Euro-Zone Growth Strenthens Currency

Posted November 12, 2009

The US dollar weakened against the euro as the Euro-Zone economic picture improves. US President Barack Obama will be visiting China and the issue of the fixed rate yuan is expected to come up. Oil prices dropped leading to a weakening in the Mexican peso and the Canadian dollar among others.

 

A report is expected to come out that will indicate the Euro-Zone GDP rose by .5 percent in the third quarter of 2009.  This has led to more weakening in the US dollar against currencies from countries with higher yields.

The greenback fell against the euro to $1.4860 and against the yen to 90.23 yen.  As Japanese investors did in the past, there is an expectation they will be repatriating funds earned on their US investments.  Financial analysts have been warning the US dollar would weaken further and that is exactly what is happening.

The US dollar also fell against the Australian dollar. One Aussie buys 92.53 US cents.  The Australian dollar is expected to post a second weekly gain this week as the number of Australian workers increased in October by 24,500.  The Aussie rose against the Japanese yen to 83.52 yen.

Investors should also take note of the fact the Norwegian krone rose 5.6630 krones per US dollar.  Norway has a 1.5 percent interest rate compared to a rate of zero to .25 percent in the US.

The Euro-Zone, like the UK, has been freely injecting cash into the economy. The Euro-Zone’s loose monetary policy appears to be coming to end as the European Central Bank has decided to end its loan program which gives banks 12-month loans anytime they request.

President Barack Obama is on a trip to Asia and will be meeting with Chinese officials. The event is the Asia Pacific Economic Cooperation Summit being held in Singapore and Beijing.  Most expect the topic of the yuan exchange rate to come up. China has a fixed rate policy and has been pushing policy makers at the G-20 to address the issue of trade imbalances.

China’s economy grew by 8.9 percent during the 3rd quarter of 2009. The fixed rate policy might change to a managed float system eventually though China has not said that would happen once the recovery is solidly advancing.

The yuan is expected to strengthen. It is currently at 6.5895 yuan per US dollar. China has been accused of manipulating the yuan though it publicly denies it. The US wants the yuan to be subjected to the currency market forces like other currencies. China holds more US debt than any other nation and holding the yuan at a pegged rate has given China a competitive edge in global markets.

The Canadian dollar weakened as the price of gold and oil fell. Oil for December jewelry has dropped to $76.70 a barrel.  Gold has fallen to $1,102.80 per ounce. Raw materials make up over half of all Canadian exports which is why the currency is sensitive to commodity price changes.

The Canadian dollar ended yesterday at C$1.0556 against the US dollar. This equates to one Canadian dollar being able to buy 94.73 US cents.

The Mexican peso weakened also as oil prices fell. Oil is Mexico’s largest export. The peso weakened to 13.2044 pesos per US dollar. Mexico’s political parties have still not been able to come to agreement on how to balance the 2010 budget which is putting the country at risk of another credit rating downgrade.

The Venezuelan bolivar fell against the US dollar to 5.53 bolivars per dollar. The government has indicated it is studying a devaluation of the exchange rate maintained in an unregulated market.  In the unregulated market, investors buy bolivars and then sell them in overseas market for dollars.  The official exchange rate is 2.15 bolivars per US dollar.

The Columbian peso also fell to 1,968.77 peso per US dollar. This was due largely to the decline in global oil prices.

 

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