Russia and China Flex Currency Muscles

Posted June 10, 2009

The Australian and New Zealand dollars strengthened as the global recession continues to slow. The yen weakened as investors turned to higher yielding assets. Russia, China, India, and Brazil decide to purchase IMF bonds rather than US Treasuries in a show of economic power.

 

The Australian dollar rose yesterday, 10-June-2009, against the US dollar as investors continue to show confidence a recovery is in the making.  The markets are becoming hungrier for higher yielding assets and that is resulting in increases in currencies such as the Aussie.

The Australian dollar increased to 80.61 US cents.  The New Zealand dollar also rose against the US dollar to 62.94 US cents.  One of the reasons investors are feeling more confident this week is due to the fact the economic reports indicate May industrial production in China rose by 8.9 percent.

The US dollar weakened against the UK sterling also to $1.6378.  In the UK there are also signs of economic recovery in industrial production.  In fact the numbers show an increase for April for the first time in fourteen months.  The pound strengthened against the euro to £0.8561.

The US dollar did strengthen against the euro to $1.4028.

As would be expected in a global recovery, the yen weakened as investors searched for higher yielding assets.  The yen fell to 98.01 yen per US dollar and to 137.47 yen per euro.

The Japanese economy contracted by 3.8 percent for the quarter ending 31-March-2009.  The contraction is attributed primarily to export declines, and the economy is expected to begin a slow turnaround.  The speed of recovery will depend to a large part on the rate of recovery in the countries which have the highest rates of Japanese imports.

Oil rose to over $71 a barrel which benefitted the Colombian peso.  The peso rose to 2,053.76 pesos per dollar.  The increase in commodity prices, including gold, also contributed to the increase in currency rates in Australia and New Zealand mentioned earlier.

Mexico continues to battle the recession as investors speculate the country’s credit rating is going to be lowered after the July elections are over.  Standard & Poor’s has already lowered the outlook rating on Mexico’s debt to negative from in May and now there are fears the credit rating will also be reduced.

Russia is making good on its stated intention of reducing dependence on the US dollar.  The government has approved the purchase of $20 billion of bonds but not in the US.  The purchase will be made through the International Monetary fund and Russian reserve currency accounts are to be diversified.  The central bank is planning on reducing its holdings of US Treasuries through the purchase of IMF bonds.

Russia is following the lead of China.  China has been saying for months it believes there should be a more global world reserve currency composed of a basket of currencies rather than a single currency. Currently 80 percent of currency reserves are in the US dollar.

In addition to Russia and China, Brazil and India are also planning on similar moves.  These countries will lower their US Treasury holdings by purchasing debt from the IMF rather than the US government.  This can pose a problem for the US which is facing record debt for the fiscal year to end 30-September-2009.  The Congressional Budget Office reported the US debt will reach $1.75 trillion.  US Treasury Secretary Timothy Geithner assured China last week there is a market for the US Treasuries but the purchase of bonds through the IMF reflects the growing economic power of Russia, China, India and others.

South Korea has reported the recession is easing in the country but the rising price of oil is rapidly creating a threat of inflation.  The Bank of Korea met and decided to keep the benchmark interest rate at 2 percent.  The country’s GDP is expected to recover slowly, but oil prices have the ability to negatively impact economic recovery.

 

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