US Treasury Secretary Timothy Geithner spoke before a Congressional committee yesterday, reassuring them that most US banks have sufficient capital to endure the recession.  This led to a weakening of the US dollar against most global currencies as investors almost immediately began to look for higher risk assets where they can recoup some losses.  The US dollar lost some of its appeal even as Geithner spoke.

What is particularly interesting about these comments is that at the same time, the IMF was saying US financial credit losses will account for 67.5% of the expected global losses of $4 trillion.  These losses will be absorbed by the very banks which Geithner said have enough capital.  That makes you wonder whether the banks really needed the TARP program bailout funds.  In fact, the largest recipients of the TARP funds are trying to pay them back to the US government and the Treasury department is balking.

There is a lot of backdoor financial activity occurring.  Despite President Obama’s assurances his administration is not interested in bank nationalization, there is a plan in place convert some of the bailout loans to common stock.  That would equate to the US government owning a piece of the banks.

In the UK, the same kind of discussions are occurring as the country faces dealing with a massive amount of debt due to injecting cash into the financial sector. 

The US dollar weakened to $1.2946 dollars per euro.  It also fell against the Australian dollar (71.10 US cents); fell against the Swedish krona (11.08 krona per euro); and fell against the New Zealand dollar (56.26 US cents). 

The yen weakened against the US dollar to 98.81 yen per dollar.  It also weakened against the euro to 127.92 yen per euro.

The weakening of the two safe haven currencies is the result of indications the credit market is thawing and increasing confidence the recession is beginning to finally bottom out globally.  Yet it is so difficult to reconcile the news of credit losses and the news the banking industry is becoming more stable.  Can it work both ways?

Tesco Plc, the second largest retailer in Europe, reported good news yesterday which drove the pound up.  Tesco said sales in its UK stores open at least a year had risen 3.4 percent in the last six weeks.  Burberry also reported better than expected revenues in the UK. 

The UK pound strengthened against the UK dollar as signs of improvement in the UK economy were revealed.  The UK pound rose to US$1.4696.  It also strengthened to 88.45 pence per euro.

The Canadian dollar also strengthened against the US dollar in response to Geithner’s comments about the US banks having enough capital.  The loonie rose to C$1.2372 against the US dollar.  The Bank of Canada lowered the benchmark interest rate to .25 percent this week, surprising many analysts. 

The volatility in the currency market was expected this week as major global companies report earnings.  Because they have not been given advance notice of expected profits or losses, the markets have not been able to build in their optimism or fears.

Today, the IMF is issuing a report on what it will take to stabilize the global economy.  Called the Global Financial Stability Report, it outlines a course of action.  On Friday there will be discussions on how to form the basis for talks between the Group of Seven industrialized nations and the G-20.