Posted November 08, 2009
The euro reached a weekly high yesterday against the US dollar. The G-20 met over the weekend but did not discuss the weakening dollar. The Brazil real appreciated as the government searches for ways to control the currency’s rise. The Canadian dollar rose as gold and oil prices increased.
The euro reached a weekly high when paired with the US dollar reaching $1.4897 at one point yesterday. The US dollar also fell against the Australian dollar to 92.25 US cents.
The G-20 had been expected to discuss the US dollar’s decline but the group did not officially report on the topic. The IMF has said that it appears traders are using the US dollar to fund global carry trades and further dollar declines are possible. Traders are selling the soft dollar and buying higher yielding assets.
The official IMF report said, “There are indications that the U.S. dollar is now serving as the funding currency for carry trades. These trades may be contributing to upward pressure on the euro and some emerging-economy currencies.”
The New Zealand dollar rose to 73.37 US cents.
The G-20 meeting may not have discussed the US dollar’s decline, but it did cover some contentious points concerning how to rein in bank risk-taking. There have been a number of proposals and one of them is a Tobin tax. This would be a tax on financial trading transactions. UK’s Prime Minister Gordon Brown is supporting the levy and US Treasury Secretary Timothy Geithner is objecting. There will be much more discussion in the coming months over how to prevent a global financial disaster, like the last one, from happening again.
One thing the group did agree on is the fact stimulus programs cannot be withdrawn yet because the recovery is not strong enough to support itself. Withdrawing these programs too early could cause the recovery to backslide. The long term goal is to make the global economic picture less dependent on US domestic demand an on the need for Chinese savings. The G-20 also hopes to find various ways to bring about more balanced global trade.
The focus on China includes encouraging the government to permit the yuan to appreciate. The IMF believes the yuan is undervalued but Chinese officials do not agree.
One interesting note is that some government officials believe that, as the recovery gets stronger, many of the good intentions for global economic cooperation are going to recede. There are already signs of independent thinking and policy making that signals a return to pre-recession behaviors. Some believe there are already signs of the global financial system once again developing packages of risky assets like the toxic assets marking the current crisis.
The Canadian dollar strengthened against the US dollar as commodity prices increased. Gold prices rose to $1,101.90 for December future deliveries. Oil has risen to $77.43 a barrel for the same time period. The Canadian dollar posted a weekly gain and is at C$1.0753 which means one Canadian dollar buys 92.99 US cents.
The loonie has not posted a weekly gain since 16-October-2009. Oil is Canada’s largest commodity export. Currently the country’s interest rate is at .25 percent and is expected to remain at this historical low for at least half of 2010.
Brazil’s real also posted a weekly gain against the US dollar and ended the week at 1.7202 reais per dollar. The government has been searching for ways to slow currency appreciation but to no avail. A recently imposed tax on foreign investments has had little, if any, impact.
Some of the strategies that could be implemented include foreign currency intervention and or allowing foreign investors to buy Brazil’s securities with foreign currencies. Brazil currently plans in issuing real-denominated bonds. In conjunction with these strategies is an intensive review of the foreign currency flows and the current exchange-rate system.
Global eyes remain on Mexico this week as the country continues to try and reduce its budget deficit for 2010 to avoid a credit rating downgrade.