Currencies Respond to News of Slow Economic Recovery

Posted June 16, 2009

The US dollar weakened after President Obama reported economic recovery will be slow. Russia revs up the talk about a new world reserve currency that is a basket of currencies. Mexico’s peso falls on the news the US economy will not see a recovery any time soon.

 

American President Barack Obama made a statement yesterday informing the public that the US unemployment rate could very well reach 10 percent.  He also said the US economic recovery could take a very long time.  It had been hoped that the final joblessness number would fall short of 10 percent before reversing its increasing rate.  The mixed economic signs in the US include a rise in new home orders and a decline in industrial production for May.  This means the recession is far from over.

In fact there is growing concern the recovery will be anemic for many years and growth will be extremely slow. 

The impact on currencies was swift as investors sought safe haven assets.  The yen strengthened against the US dollar to 96.34 yen per dollar.  The yen also rose against the euro to 133.21 yen.

There is a fairly new summit group with the acronym of BRIC which stands for Brazil, Russia, India, and China. This group met in Yekaterinburg to discuss the status of the US dollar as the long term global reserve currency among many other topics.  It was interesting to note this agenda item was included since Russia had just declared there was no alternative to the US dollar at this point.

This meeting of BRIC shows its increasing status as an economic power.

Dimitry Medvedev, Russia’s president, was quoted as saying, “We have to consolidate the international monetary system, not only through the consolidation of the dollar but the creation of new reserve currencies.”   But BRIC made a point of not pushing the issue of a global reserve currency beyond these statements.

Obama’s comments coupled with Russia’s statement and the mixed US economic data led to a weakening in the dollar.  The US dollar fell against the euro to $1.3844.  The dollar also weakened against the Swiss franc to 1.0880 francs per dollar and the Aussie to 79.66 US cents.

The UK got better economic news as consumer prices fell less in May than was expected.  The UK pound rose to $1.6424 when paired with the US dollar.  Sterling also rose against the euro to £0.8428.

Mexico’s peso weakened in response to Obama’s statements about the time it will take for the US to recover from the recession and the drop in US industrial production.  Mexico’s economy is heavily dependent on the condition of the US import market. 

The Mexican peso fell to 13.50 pesos per US dollar.  Mexico has struggled with a number of economic issues including the recession and the financial impact of the swine flu leading to a fall in tourism dollars.  There is little hope for recovery in Mexico until the US economy begins to rebound so Obama’s statements put downward pressure on the Mexican peso.

The Chile peso strengthened after the government indicated it was making plans to repatriate a portion of its assets invested outside the country.  The peso has strengthened by 15 percent this year.   It rose to 555.40 pesos per US dollar.  Chile plans on selling $40 billion in daily allotments equal to $40 million.  This move surprised many analysts.

 

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