DESPITE the many shocking events that have already taken place in 2011 such as the political conflict in North Africa and the Middle East as well as the Japanese earthquake disaster, the currency markets have been strangely becalmed.

It seems that the markets are stuck switching between a ‘risk appetite on’ versus ‘risk appetite off’ frame of mind where they cannot make up their minds on a decisive currency direction.

Instead, sentiment is changing from day to day, reacting to every nuance of economic data and geopolitical news.

The recurring theme so far this year has been the inexorable rise of commodity prices, exacerbated by the recent turmoil in the Middle East and North Africa.

The continuing economic boom in China and other emerging markets has driven the price of Brent crude oil from the $95 per barrel (pb) level in January to over $120pb in mid-April. This is a level not seen since 2007 when the oil price went on to peak at $147pb.

Even greater rises have been seen in other commodities such as cotton, copper and nickel, while gold climbed to a record high of $1,475 per ounce. Other precious metals such as silver and platinum have also seen remarkable increases in price.

Never before have we seen such large rises in the cost of raw materials so soon after a protracted recession in the Western world.

The price volatility seen in the commodities market has not been reflected to the same extent in the FX market.

One potential reason for this is that it is hard to differentiate between the world’s major currencies, namely the US dollar (USD), euro (EUR), sterling (GBP) and the Japanese yen (JPY). They all offer low rates of return and are experiencing lacklustre levels of economic growth combined with high levels of debt.

This is truly an ugly sister’s competition with none of the participants having any attractive features.

The lack of a positive choice among the big four may explain why the market has had little option but to take a specific stance on other currencies, especially emerging markets and currencies which have a significant exposure to commodities such as the Australian dollar, the Canadian dollar and Norwegian krona.

It is here where we are seeing more dramatic moves.

The lack of differentiation between the majors, however, now appears to be changing as the market has switched its attention to the fiscal problems in the US, while the ECB has raised interest rates for the first time since 2008.

Indeed, recent downward pressure on the USD has come at a time when the bulk of the economic news should have been USD supportive.

On 7 April, Portugal became the third eurozone country to ask for a financial bailout; meanwhile, in the UK, inflation has eased back and there are growing warnings from the retail sector about a slowdown in consumer spending.

In addition, there is now clear evidence that the US economy is recovering well from the downturn, prompting the US to consider an end to its additional Quantitative Easing (QE2).

Despite this, the USD sold off with EUR/USD breaking $1.45 on 12 April for the first time since January 2010. The Euro looks a little prettier although doubts persist whether the Euro can maintain a level above $1.40 and shrug off recent increased market speculation of a debt restructuring in Greece, a Euro-skeptic victory in Finland and reduced demand in Spain's bond market auctions.

The ugly contest is turning uglier. The reality is, for now at least, the US dollar has lost some of its shine because of the last-minute budget deal that only narrowly averted a government shutdown.

Despite the apparent resolution of the impasse, the bitter political fight has raised questions about the ability of President Obama and a divided US Congress to deal with bigger fiscal issues looming ahead.

In addition, the US presidential process has kicked off and that should mean that no candidate will attempt to seriously tackle the situation until 2013.

As far as Sterling is concerned, it has appreciated against the weak US dollar over recent weeks, consolidating above $1.60. Its overall performance, however, especially against the Euro and other emerging market and commodity currencies, has been poor.

With the world in turmoil and currencies being buffeted by so many conflicting crosswinds, it is essential that UK businesses consider a flexible strategy that allows them to both protect against adverse currency movements and take advantage of more favourable moves.

HSBC has a local team of risk management specialists to help you protect your business from volatile foreign exchange rates. Please email me