UK and US Currencies Strengthen in Face of Easing Recession

Posted June 07, 2009

The US dollar strengthened against the yen even as the US recession continues to ease. The UK pound has risen 22 percent this year against the US dollar but the trend is expected to reverse. The IMF discusses the possibility of developing a new world reserve currency.

 

The US dollar strengthened by Sunday evening New York time against the yen even as investors become more confident the recession is ending.  The greenback reached a 3-month high of 98.89 yen on Friday before falling back to 98.521 yen by late 7-June-2009.

US jobless rates came in at 345,000 for May which places the US unemployment rate at 9.4 percent.  The May rate was much smaller than the forecasted 520,000 which fuelled further speculation the recession is ending.  Yet there are so many problems still imbedded in the financial system that some economists are warning people to not become overconfident.

In fact, in the UK the same conditions exist as in the US.  Unprecedented government debt has been issued to stimulate the economy and the financial conditions are still precarious.  Yet the pound has seen a 22 percent increase against the US dollar in the last 3 months.  To many this makes no sense and they believe the most recent market increase could very well be a bubble. 

The pound is currently at 1.5969 when paired with the dollar.   Prime Minister Gordon Brown asked for the resignation of some of his cabinet members as he reshuffles the makeup of his advisors.  There has been speculation that Brown himself will resign, but he has denied that it is a possibility.  A European election was held Sunday night and the Labour Party is expected to do poorly.

The US dollar rose against the euro to $1.397 for the same reason it strengthened against the yen – signs the US recession is easing.  The euro weakened against the yen to 137.89 yen.

Investors and economists expect the Federal Reserve to raise benchmark interest rates by the end of this year.  This will increase demand for the dollar. 

The discussion concerning the role of the US dollar as the primary global reserve currency took on new importance when the International Monetary Fund said eventually a new basket of currencies could become the global reserve currency.  Up to this point it has been China and then Russia that have pushed this agenda, but the IMF has now indicated this idea has some merit.  After the collapse of the US financial markets in 2008, it is not surprising that other countries are looking for ways to minimize exposure to such an event again.

Replacing the US dollar with IMF special drawing rights based on a basket of currencies would take time.  But the US deficit has created a lot of concern about the stability of the dollar and the economy.  The current rate of US debt is seen as being unsustainable over time.

Brazil is expected to officially report it entered a recession at the beginning of 2009.  The GDP numbers for the first quarter are expected to show a 2.1 percent contraction.  The real rose 1.9 percent last week against the dollar to reach 1.9343 real per dollar.

Taiwan’s central bank declared the country’s currency has “dynamic stability”.  The Taiwan dollar weakened against the US dollar to NT$32.720

 

Comment