Brother, Can You Spare a Dime?

Posted March 03, 2009

The US dollar is finding strength in a very volatile currency market which is proof of continued lack of market confidence. On the flip side of the coin, risk aversion is putting downward pressure on the euro as the impact of denial of Eastern European aid by the European Union continues to filter down.

 

A quote from a 1975 movie made in the USA came to represent the Great Depression, the beginning of which is signified by the collapse of the stock market in 1929.  Of course, there were many factors leading up to market declines, but people began to pull money out of the banks and that caused them to collapse also.  It was the start of a terrible economic period which lasted 10 years.  What made it less severe than it could have been was the fact that globalization was minimal.

That is one reason analysts are very careful to avoid the “d” word which stands for depression.  Today the world is globalized and each country is dependent on others for its economic stability and survival.  It’s as true for the US as it is for the UK, Japan, Hungary, Canada and all others. 

The Federal Reserve Chairman Ben Bernanke tried his best to give markets some positive viewpoints.  It looked like the equity markets would recover some losses, but in the end it was another case of government officials talking and stock values dropping.  And when equity markets go down, currency values go up.

The US dollar strengthened against the euro and 5 other global currencies.  The dollar index tracks the US dollar against the euro, yen, pound, Swiss franc, Swedish krona, and the Canadian dollar. It rose to 89.327 yesterday which is a .4% percent increase.  The US dollar also strengthened against the yen to 98.16 yen per dollar.

Though Ben Bernanke tried to reassure investors there is hope for an economic recovery, he also made it very clear the banking system is far from stabilized.  That was sad news for the markets which responded with clear signs of risk aversion.  The Dow Jones Industrial Average dropped another 37.27 points leaving the market at a 12-year low at 6,726.02.

The euro is still weakening partially due to the financial condition of Eastern Europe.  The failure of the European Union to provide financial help to Hungary and other Eastern European countries is a crisis that will bubble to a top in the near future as financial debt comes due.

Mexico has been dealing with the devaluation of the peso as exports dropped due to the US economic condition. But yesterday, the peso strengthened when the International Monetary Fund indicated it is considering making short-term loans available to member countries. 

The UK pound weakened against the US dollar as the UK gets closer to a policy of quantitative easing.  The increased money supply coupled with an expected decrease in the benchmark interest rate is causing pound weakening.  Sterling closed the previous day at $1.4018 per US dollar.  It also weakened against the euro to 89.50 pence per euro.

In an interesting note today, US President Barack Obama promoted investing in the US stock market.  This is something a US president has never done up to this point and it has already come under a lot of criticism.  It is like an analyst said:  The Federal Reserve Chair or head of the Bank of England never makes a currency recommendation and heads of country don’t give investment advice.

Oh yeah?

The “d” word is being whispered in the investment halls, because the financial markets remain unstable despite billions in government aid packages.  One analyst was quick to point out there can be a mild depression which means there won’t be as many people asking for that dime.  It’s probably a good thing, because a dime will not buy much anymore. 

Bother, can you spare a dime?   Probably not….

 

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