US Dollar Weakens As Commodity Prices Rise

The US dollar weakened against the euro by a significant amount yesterday.  In fact it fell the most it has in the last six weeks.  One of the reasons was found in the growing opinion among analysts that the Federal Reserve will keep interest rates the same for the rest of the year.  The goal of such a policy is promotion of economic growth at the end of one of the worst recessions experienced in many decades.

The US Federal government will probably continue its Treasury purchases, and in fact, had a successful $40 billion sale yesterday of 2-year notes.  The yield on the 2-year notes fell to 1.10 percent.

The US dollar fell to $1.4108 when paired with the euro.  This is the most it has weakened since 8-May-2009.  The yen advanced against the euro to 95.22 yen per dollar. 

With the fall in the US dollar came an increase in the price of a barrel of oil and gold and silver.  The falling dollar made commodity futures look more appealing for profit seekers.

The UK pound weakened against the euro to 85.89 pence per euro and against the US dollar to $1.6389 pence per dollar.  The UK pound fell as Bank of England Chief Economist Spencer Dale indicated he believed the currency exchange rate could be used to generate economic growth.  This led to a sell-off of sterling.

Spencer Dale was quoted at the Society of Business Economists as saying, “As with interest-rate changes, the exchange rate is a key channel through which the monetary easing may be transmitted.”

The UK pound also fell against yen to 155.89 yen per pence.  The UK government is going to auction 220 billion pounds of gilts this year in its battle against the recession.

Brazil’s currency, the real, strengthened as commodity prices increased.  With a $1 increase in the cost of a barrel of oil, the currency rose to become the world’s best currency performer.  It gained 2.7 percent against the US dollar to reach 1.9794 real per dollar.  Oil and other commodities account for up to two-thirds of the country’s exports.

The Canadian dollar strengthened against the US dollar also to 86.99 US cents.  The loonie rose as commodity prices increased with crude oil being Canada’s largest export.  The second largest export is copper.

The Euro-Zone is not recovering from the recession as expected.  In fact, France just released figures that show a reduction in May consumer spending for manufactured goods.  By this time it had been hoped that the Euro-Zone economies had at least stabilized.  There are signs of recovery in the numbers for the June purchasing manager indices for the Euro-Zone but even those are not as high as had been hoped. 

The final second quarter numbers are expected to show an overall 16 country region contraction.  The estimated second quarter results are expected to show a 2.5 percent GDP contraction.   At this point the general opinion is that GDP expansion will probably not occur until 2010.

International organizations such as the World Bank are warning developed nations they should assist emerging markets with recovery in order to insure an economic recovery.  The emerging nations are struggling with loss of exports and devaluing currencies and need assistance in order to restore economic growth.  Without it there cannot be a global expansion which benefits all countries.

The currency market was fairly quiet again today as were the equity markets around the world.  Investors continue to search for ways to earn profits in a world of volatile economic activity.  It has been made clear this year so far that the recession is far from over.