15 Month Low for US Dollar

Posted November 17, 2009

The U.S. dollar fell to a 15 month low when paired with most global currencies. Obama and Jintao discuss trade and currencies. The IMF suggests there is a need for reliance on a basket of currencies for trade reserves rather than the single US currency. The Australian dollar weakened casting doubt on a December interest rate increase.

 

Equity stocks went up and the US dollar went down. That describes Wednesday’s activity in a nutshell. In fact the U.S. dollar weakened to a 15 month low even as Federal Reserve Chairman Ben Bernanke made comments about the need for a strong dollar. Many global policy makers have accused the US of giving lip service to a stronger dollar and are not backing up the words with any action to make it happen.

As commodity prices for gold, copper and oil and many others began to rise, investors quickly accepted additional risk. The US dollar began to slide and that only served to fuel additional greenback downward movement. Gold reached $1,140 an ounce while copper rose 5 percent in a single day. In the last 5 weeks rice futures have jumped 16 percent. Oil jumped also to $79.45 a barrel for December future deliveries.

What this means is that inflation is lurking around the corner and at some point will become a factor to control.  But for now, Bernanke indicated the US does not see inflation as a threat and will maintain historically low benchmark interest rates for the foreseeable future. In addition, he implies the economic recovery is not stable nor assured yet and that is why the US intends on postponing the implementation of exit strategies for stimulus programs in place.

The US dollar weakened to $1.4970 against the euro and to 89.048 yen against the Japanese currency.  The US dollar also fell against the UK pound to $1.6830.

The Dollar Index, pairing the greenback with a basket of 6 currencies, fell to 74.679 and that is the weakest the index has seen since August 2008.

The Australian dollar weakened after a period of increases leading to speculation the central bank will be increasing the nation’s benchmark interest rates again in December. With the Aussie weakening though, the bank may decide to hold off on any more increases until 2010.

The Aussie was at 93.38 US cents per Australian dollar.

China’s President Hu Jintao and U.S. President Barack Obama are currently meeting, but there has been little progress on a number of issues including climate change, human rights, and the value of the yuan and its relationship to balanced global trade. China has held the yuan at 6.83 yuan per dollar for the last sixteen months. The U.S. claims this is causing unfair trade imbalances.

The International Monetary Fund issued remarks that it believes global currency stability can only be achieved when there is more than one trade currency unlike now.  Currently most global trading is completed using the U.S. dollar. The IMF has discussed the possible use of Special Drawing Rights as a possibility for a future global reserve currency.

As China’s economic power grows the belief is a basket of currencies should include the renminbi among several others in addition to the U.S. dollar.

 

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