From a Rally to Scepticism
The same US Federal Reserve quantitative easing policy announcement that caused a stock market rally on Wednesday led to scepticism on Thursday. Investors were excited about the possibilities and then apparently began assimilating the reality.
The reality they came up with is this: the plan to buy mortgage bonds may not work to stimulate the credit and housing markets. In the meantime, billions of dollars are going to be pumped into the financial markets and fears the money influx is going to lead to inflationary pressures are growing.
In a nutshell, the DJIA retreated and so did the US dollar. Commodity prices rose as investors sought a hedge against inflation. The US government is issuing debt and then printing money to buy the debt. What a deal…a deal that could easily lead to hyperinflation.
The US currency continued to devalue against most major global currencies. It weakened to $1.3666 against the euro. It also fell against the yen to 94.46 yen per US dollar and against the UK pound to $1.4508.
One of the biggest changes seen was in the pairing of the US dollar and Norwegian krone. The US dollar weakened against the krone to 6.2866 krone per dollar. This represented a 4% gain for the krone in a single day.
There are further declines expected in the value of the US dollar as the US money supply expands.
The Australian and New Zealand dollars also rose against the US dollar which is to be expected with commodity price increases. The Australian dollar strengthened to 68.87 US cents and the New Zealand dollar advanced to 55.69 US cents. When investors are ready to purchase higher yielding assets the 3.25% Australian interest rate and the 3% New Zealand interest rate are attractive. The interest rate in the US was maintained at near zero by the US Federal Reserve during its meeting this week.
The Canadian dollar also strengthened against the US dollar. This is another case of investors being willing to accept more risk in their investments. The Canadian dollar reached C$1.2396 against the US dollar.
The Chile peso lost the last two days against the US currency, but that changed on 19-March-2009. The peso strengthened by 1.5% against the US dollar to 584.6 pesos. This was primarily due to the increase in the price of copper futures by 5.5%.
It is difficult to predict where the markets are headed right now. Though the US dollar is currently devaluing, a sudden decline in the stock market could reverse the trend. Markets are still in a state of flux as they respond to global efforts to combat the recession.
The UK economy is considered to be the weakest among the G-20 countries. It is predicted the country’s GDP will recover at a much slower rate. Unfortunately the recession has not found bottom yet and there is much concern in the financial markets that current stimulus programs are still not working.
The AIG scandal in the US is taking a lot of Congressional attention right now. AIG is a US based global insurance/financial company that was a major contributor to the conditions leading to the global recession. The company had decided to pay millions of dollars to executives despite the company losing billions of dollars in derivatives and accepting billions of US bailout funds. The American public is outraged and apparently Treasury Secretary Timothy Geithner knew about the bonus payments and did not stop them nor warn the public.
Though this may seem like a US problem, it negatively impacts the global view of the ability of the US to maintain control over the economy, the recession, and the stimulus programs.