In one respect, 2011 was a year in which nothing happened. By this, I mean that it was a year of remarkable exchange rate stability, at least from a sterling perspective.
During 2011, the euro/sterling exchange rate traded between €1.108 and €1.1995, a range of just over 8 per cent, its smallest since 2006. The dollar/sterling rate ranged between $1.543 and $1.668, the narrowest trading range since 2002. And sterling's trade-weighted index had its smallest range for six years.
A different measure of exchange rate variability, the coefficient of variation (the ratio of the standard deviation of weekly exchange rates to the average rate, measured over 52 weeks) tells a similar story. It shows that sterling's index has been close to its most stable level since the collapse of the Bretton Woods system in 1971.
Looking at the numbers alone, one might imagine that the Bank of England was targeting the exchange rate. But it isn't – and if it were, it couldn't do such a good a job of ensuring stability.
Instead, sterling has been stable for a more mundane reason – there's been no good reason for it to move much. For example, while the US has enjoyed better growth in output and money demand than the UK, these supports for the dollar have been offset by lower interest rates than sterling offers. And with the Fed pledging to keep rates "exceptionally low" until mid-2013, interest rate expectations have weighed down the dollar, too.
Nor has the eurozone's debt crisis been a reason for sterling to rise. For one thing, the UK economy would also suffer if the crisis deepens; fears about the crisis have thus been a reason to avoid both sterling and euros. Not that it has been much of the latter. The euro is dominated by the relative safe haven that is Germany; its economy is half as big again as Italy's and 10 times the size of Greece's. Also, sterling has had a couple of negatives relative to the euro; a current account deficit and slightly higher inflation. Small as these are, they have offset the slight positive for sterling of the debt crisis.
Adding to the stability has been the decline in importance of the carry trade – borrowing in one currency to hold another. Small interest rate differentials, plus the fact that traders learned in 2008 that months of profits on such trades can be wiped out in days, have curtailed carry trades and hence a potential source of volatility.
One might infer from this stability that there is a case for the UK to join the euro. After all, if sterling isn't moving anyway, we won't lose exchange rate flexibility by joining the single currency.
This, I think, would be wrong. The case for having a separate currency is not that it gives is exchange-rate flexibility in normal times, but rather that it gives us monetary policy flexibility in extraordinary times.
Instead, the lesson here is simply that volatility is itself volatile. It comes (as in 2008) and it goes. And this raises a possibility – that perhaps one surprise for 2012 might be the re-emergence of exchange-rate volatility.