Posted January 20, 2009
The UK pound continues to weaken against other major currencies as the new UK bailout brings fears of weakness back into the financial markets. The Russian ruble strengthened due to resumption of gas flows through the Ukraine pipeline. The world is waiting for the new US President to take office.
The United States is getting ready to put a new President into office and the world watches and waits. US citizens have a propensity for creating catchy names and the question is whether the “O’Conomy” will soon be any better than the one in existence right now. The US greenback traditionally strengthens when a new US President takes office.
The US dollar most likely will continue to strengthen but chances are it won’t become a trend due to the multi-trillion dollar debt the country is facing. This debt will have to be financed. These are also not traditional markets and all the old rules have been broken. When rules are broken it is difficult to know how to play the game.
The global economy is clearly on a continued downslide. For example, the S&P has just downgraded Spain’s long term debt and it won’t be the last country facing this problem. The Royal Bank of Scotland just accepted more bailout funding from the UK government. The RBS announced it had a loss for 2008 of 28 billion pounds and it is almost all due to two actions. First the RBS had purchased the US mortgage related securities in the market that collapsed several months ago. Second the RBS bought the Dutch bank ABN Amro.
But the British government really cannot just take RBS to task for taking on risky securities. As discussed on 19/January/2009, Prime Minister Gordon Brown has announced the government will be spending more bailout funds to prevent failures in the nation’s banking system. After purchasing more RBS toxic assets, the government will own 70% of the bank, but that is not the only bank in trouble.
The currency rates have responded as expected. The UK pound has weakened against the yen, the euro, and the US dollar. In fact, the UK pound is reaching record lows when compared to the yen at 125.86 yen per pound. The pound also weakened to $1.3954 US dollars per pound. Against the euro, the rate weakened to 92.94 pence per euro. In fact, the pound weakened against all the major global currencies. There will probably be another interest rate reduction implemented by Bank of England as the inflation rate falls.
The yen remains one of the strongest currencies right now. It strengthened against both the euro (117.06 yen per euro) and the US dollar (90.26 yen per US dollar).
Russia and the Ukraine finally settled their differences over the gas pipeline enough to resume the flow. This led to a stronger Russian ruble against the euro. It strengthened to 43.4190 rubles per euro. Of course, demand for gas is still depressed due to the recession, but it did mean the Russian government did not have to devalue the currency yet again. The price of a barrel of crude oil reached an astonishingly low $34.31.
The condition of the banking system around the world is the biggest concern in the financial markets right now. Some economists have taken the stand you can’t spend your way out of this economy and the government bailouts will not work. This has created a highly speculative market on all fronts including the equity and currency markets.
Will the “O’Conomy” be the impetus needed to turn the recession around? People in countries around the world are putting a lot of hope and faith in his abilities. If you don’t believe that just consider the fact the gas is flowing again in the Ukraine and the Israel-Hamas conflict was halted just in time for the US inaugural day.
The party is over President-elect Obama. It is time to get to work.