Throw In the Kitchen Sink

Posted February 09, 2009

The US stimulus package being debated in Congress is impacting currency rates around the world as expectations of passage rise. The yen strengthened against the US dollar and euro on speculation Japanese exporters are buying currency.

 

The new US stimulus plan is still being debated in the Senate though a vote on Monday, 8/February/2009, is expected.  But even after passage in the Senate, it must still go through a compromise committee made up of the House of Representatives and Senate members.  The debate is far from over and finding a compromise might be difficult despite pleas from President Obama to do something…anything.

The world is watching to see what will be the next step taken by the US in an attempt to stimulate the economy.  The new Treasury Secretary Tim Geithner is waiting in the wings ready to unveil a new plan to bail out the struggling US financial system, but wants the stimulus package passed before making any announcements. 

The new stimulus package sits at $827 billion and contains everything except the kitchen sink.  There are a few of those probably in there too somewhere since the bill includes billions for remodeling federal buildings.  There are tax cuts, infrastructure spending, education funding, business bailout money and a host of other types of stimulus proposals in the bill.  You can pretty much take your pick and it’s probably been included.

In the meantime, every time the stimulus bill seems to come close to a vote or investors think it is closer to becoming actual reality, the stock market goes up and the US dollar weakens.  For example, the Australian dollar strengthened against the US dollar to US$.6729 in response to the stimulus proposal coming closer to Senate vote and an increase in commodity prices.

The US dollar also weakened against the Japanese yen to 91.75 yen per US dollar.  There is a lot of speculation Japanese exporters are buying the yen and this is causing the yen to rise.  Japanese inventories are at their highest levels in decades.  The yen also strengthened against the euro to 118.79 yen per euro.

The UK pound has been strengthening to post a weekly gain against the US dollar and the euro for 2 weeks in a row  The Bank of England cut the benchmark interest rate to 1% last week and the UK government has been making forceful statements about being willing to inject further stimulus money into the economy if necessary.  The markets have been responding favorably to these actions. The UK pound rose to $1.4789 against the US dollar and 87.49 pence against the euro.

The New Zealand dollar weakened against the US dollar and the yen on declining exports.  The kiwi declined to US$.5292 and to 48.56 yen per New Zealand dollar.

You can speculate all you want about whether the new US stimulus plan will finally shake credit loose and prevent a financial industry collapse.  The health of the US economy impacts the health of global economies, though the Davos World Economic Forum discussions made it clear a number of countries see the US weakening as an economic power in the future.

Many investors believe the stock markets will rise by the end of 2009 and the US dollar will weaken.  They also believe it will take more stimulus dollars once this new legislation still being debated is approved and spent.   That begs the question: what is inflation going to look like in countries such as the US which are printing money as fast as possible?  The US right now is looking at the need to finance $1.5 trillion dollars between TARP and the new bill which will probably be signed into law in the next couple of weeks.

If the stimulus package has the kitchen sink included, someone needs to figure out how to turn off the tap soon.

 

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