US Dollar Rising As Industrial Activity Increases
The US dollar strengthened against the yen and the euro as the US economy improves. The dollar advanced to 91.19 yen and to $1.3606 against the euro.
The US economy is improving enough to create speculation the Federal Reserve will move up its planned benchmark interest rate increase. The historically low interest rates have been an integral component of stimulus programs, and the US monetary policy makers are preparing to test the economy to see if it can progress on its own.
Despite the advances in economic indices published by regional US Reserve Banks, the unemployment remains at 9.7 percent and is projected to stay high for the rest of the year. The stimulus programs have failed to create the number of jobs hoped and there is now concern about loss of jobs once the stimulus programs end.
The US Federal Reserve will begin exit from stimulus programs using a combination of higher interest rates and reduction in federal assets. Right now it is all about timing.
In the Euro-Zone, the meeting of the finance ministers failed to produce a financial support agreement for Greece. The euro fell to 124.08 yen. The ministers instead asked for guarantees from Greece that it will be able to adhere to a deficit reduction plan. Greece must cut its budget deficit through a combination of tax increases and spending cuts and both measures are getting resistance among the nation’s citizenry.
The euro rallied on Tuesday when Greece indicated it would not need European Union financial support but has since fallen back.
The Canadian dollar retreated as US equity markets rose. The loonie fell to C$1.0452 against the US dollar. Over the long term, the Canadian dollar is expected to strengthen as the US economy improves. Canada’s economy is heavily dependent on the condition of the US economy.
The Brazil real advanced to 1.8304 against the US dollar. The increase was underpinned by rising commodity prices. In addition, the US reports that US housing starts for January were higher than expected has added some confidence to the markets that economy recovery will continue to advance.
The US is Brazil’s second largest trading partner. Prices for copper have been steadily rising and copper prices are considered to be a leading indicator of economic growth. Brazil is a major exporter of copper.
In addition, Brazil is increasing its trading levels with China and contracts with Chinese steelmakers will probably push prices up as industrial production increases.
The Chile peso fell against the US dollar as the dollar strengthened on news of economic recovery. The peso fell to 529.73 peso per US dollar. Investors are turning away from emerging market assets as the US dollar strengthens.
In other Latin American countries the news was a mixed bag. The Columbian peso fell to 1,932.64 peso against the US dollar. The Argentinean peso advanced to 3.8510 pesos peso dollar. The Peruvian sol remained about the same at 2.8477 sols per US dollar.
Venezuela’s unregulated parallel market showed the bolivar weakening to 6.44 bolivars per US dollar.
The Russian ruble advanced against the US dollar to 29.9956 and to 35.0092 against a dollar/euro currency basket. This was well within the trading band of 26 to 41 rubles defended by the central bank. The Russian ruble rose as oil prices increased for March deliveries to $77.05.
Bet on India Before Russia
Russia’s economy tracks the price of oil and that has been so volatile that it makes it difficult to manage the economy. In addition, Russia is dealing with imbedded corruption that is keeping the country in the 20th century. The Asian countries are progressing at an astonishing rate as they adapt to the world economic trading markets, but Russia does not know how to compete. For example, it relies on oil exports but yet has failed to make the right level of investments in production processes.
The government manages the ruble against a basket of currencies and refuses to let it operate freely, like the Chinese yuan. But China has a thriving economy and is able to compete in the world market and Russia simply does not know how. That is one reason the Russian GDP fell by 8 percent (when oil prices tumbled) and has been unable to make any progress towards recovery. No one seems to know if the Russian economy will expand any time soon and just digs itself into a deeper hole.
The ruble has little prospects right now which makes one wonder why the country was chosen to participate in BRIC. China usually doesn’t pick such troubled partners still living in the past because China wants to be seen as the future leader of global trade. India and Brazil are up and coming emerging markets too with bright futures. I think India in particular is showing some signs of real strength as a country too. They stood up to the US at that expensive (and fairly useless) climate summit. The Indian policymakers just kept saying “industry first – climate control later”.