Japanese Yen Strengthens and DJIA Breaks 9000

Posted July 24, 2009

The DJIA rose above 9,000 as the US dollar continued to weaken. The Japanese yen strengthened against most global currencies. The Canadian dollar and South African rand strengthened on both actual and speculative positive economic news.

 

The US Dow Jones Industrial Average went above 9,000 for the first time since 6-January-2009.  Investors were jubilant.  Much of the increase is due to corporate earnings reports from companies like eBay showing significant increases the 2nd quarter of this year compared to the prior quarter. 

Not to rain on the parade, but savvy investors remain cautious because the earnings reports compare the 2nd quarter to a 1st quarter that was deeply entrenched in a recession.  In addition, there is a question as to whether the 2nd quarter earnings reflect true revenue increases or just all the cost cutting that has been done by companies over the last year.

You have to be careful about interpreting numbers right now as signs the global economy is ready to springboard into recovery.  So what impact did all the equity market increases have on the dollar?

The US dollar weakened against the yen of course.  The dollar ended the day New York time at 94.69 yen per dollar and weakened against the euro to $1.4161.  The yen strengthened against the euro to 134.09 yen per euro.

The yen strengthened against most major currencies.  Though US earnings reports for some companies were strong, the tech software giant Microsoft reported disappointing earnings sending some investors back to safe haven assets.  Microsoft reported its 2nd quarter profits fell by 29 percent.

Japanese investors have been repatriating funds, causing the yen to gain, with the intent of investing in higher yielding assets.   The company UBS Global Asset Management Japan said it has raised 21.9 billion yen and will purchase foreign currencies with higher yields.  On the list are currencies such as the Brazil real and the South African rand. 

The South Korean won reached a 6-week high against the US dollar yesterday.  The government reported the country’s GDP expanded by 2.3 percent in the 2nd quarter of this year.  This was greater than the projections indicating South Korea is quickly getting on solid economic footing through increased exports. 

The South Korean won reached 1,247.50 won per US dollar.  It is expected the advance against the greenback will end the week at 1 percent.

Canada has said its recession is ending and the currency reached a 7 week high against the US dollar.  The problem Canada is already facing is a strengthening currency which is dampening the pace of recovery.

The Canadian dollar reached C$1.0997 which is 91.79 US cents.  The loonie is expected to strengthen further as commodity prices rise and the US dollar weakens.  Crude oil prices for September delivery rose to $66.73 per barrel.

The Columbian peso also strengthened against the US dollar as investors sought higher yielding investments.  The peso increased to 1,954.35 pesos per dollar which is the strongest it has been since 1-September-2009. 

Columbia’s 11 percent bonds are yielding 8.79 percent and Standard & Poor’s is considering raising the country’s credit rating to investment grade.  S&P issued a report stating, “Successfully withstanding the severe stress imposed on the Colombian economy during the global downturn could set the stage for an upgrade when the global economy starts to recover and if Colombia’s fiscal and debt profiles become stronger.”

The South African rand continued to strengthen against the US dollar reaching 7.6502 rand per dollar.  The rand was responding to the speculative news that the Indian mobile phone company Bharti might assume a stake in the South African company MTN.  MTN is also a maker of mobile phones.

In general, emerging markets are showing signs of pulling out of the recession quicker than developed nations.  The developed nations such as the UK and the US are faced with staggering public debt which is expected to eventually lead to inflation.

 

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