Yen and US Dollar Weaken On Slow Recovery

Added: February 23, 2010

The Japanese yen and US dollar fell against most major global currencies as it becomes apparent the pace of recovery will remain slow. The European Union has no plans to offer Greece a rescue package leading to a weaker euro. The Canadian dollar fell as copper prices dropped. Mexico’s peso weakened as the central bank begins a US dollar purchase plan to build dollar reserves. Higher oil prices led to a stronger Columbian peso.

The Japanese yen weakened against most global currencies as Japanese investors look for profits in overseas investments. The benchmark interest rate in Japan remains at a historic low of .1 percent. Japanese mutual funds are focusing on higher yielding securities found outside the country. This has put pressure on the yen.

The yen weakened to 91.26 yen per US dollar. It also fell against the euro to 124.21 yen per euro.

The US dollar also weakened against most major global currencies as the Federal Reserve Bank makes it abundantly clear the US economy remains weak despite some recent hopeful signs in housing and factory production. The interest rates are expected to stay low for most of this year. Currently the US benchmark interest rates are at zero to .25 percent.

The US dollar weakened to $1.3609 against the euro. The US economy is expected to experience a painfully slow recovery and high unemployment rates will endure well into 2011 and possibly 2012.

Despite strengthening against the dollar yesterday, the euro continues to struggle. The Euro-zone has been dealing with debt issues among member nations with Greece being the most pressing problem. This is due to the fact that European Union members are not certain Greece can manage a deficit reduction plan whereas Spain has already taken difficult steps to address its massive budget deficit.

There had been speculation over the last few weeks that the EU would bail out Greece, but that does not seem likely at this point. The fear is that a rescue package for Greece would set off a chain of events that are not desirable since other EU nations are in need of help also. Each country is expected to meet the European Union monetary and fiscal rules and even those were loosened during the recession. Now each member nation is expected to show workable budget deficit reduction plans.

The unfolding story in Greece concerning swap arrangements made in the past do nothing to encourage the EU to provide financial assistance. It appears that Greece arranged a series of swap agreements over the past years that enabled the country to hide its growing debt problem. The European Union has ordered an investigation. Greece and the investment groups involved in the swaps have said that the swap agreements were legal at the time. The swap agreements allowed Greece to defer interest payments into the future.

The Canadian dollar weakened against the US dollar as copper prices, on the rise recently, began to fall. Copper is one of Canada’s major exports. The Canadian dollar weakened to C$1.0424. One Canadian dollar will purchase 95.93 US cents.

In Columbia, the peso rose to 1,919.40 pesos per US dollar. The rise is attributed to a flow of foreign investments into the country. The rise in oil prices has also contributed to a stronger peso.

Argentina is suffering political problems as lawmakers oppose President Christina Fernandez de Kirchner’s plans to use bank reserves to restructure debt. The Argentinean peso fell to 3.8610 pesos per US dollar.

Mexico’s peso weakened to 12.8020 pesos per US dollar as the central bank works to build foreign reserve balances. The central bank plans on buying up to $500 million in the currency market each month. The government wants to increase its dollar holdings in order to end a credit line with the International Monetary Fund established during the recession.

Both the Peruvian sol and Chile’s peso advanced against the US dollar. The sol is at 2.8490 sols per dollar while the peso is at 528.15 pesos per dollar.

Many central banks have moved into a phase where actions are being taken to calm volatility that remains in the currency market.

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Will the EU Kick Greece Out?

Posted by News Editor at Feb 24, 2010 12:43 AM

The problems that are unfolding in Greece certainly show that the extent of the derivatives market, the collapse of which led to the recession, will take years to unfold. It is amazing that an EU member nation could be so deep in debt and able to hide it at the time of entry. You can't help but wonder what else is yet to be uncovered. The swap agreements that began with the revelation of the Goldman Sachs deal now number 15. How many more are out there or what else is being hidden? Germany sounds downright angry now about the whole situation and I don't blame them. The question is whether the EU would actually kick Greece out. I believe it could happen with this new information because keeping the swap agreements such a closely guarded secret proves Greece cannot be trusted. All of this is adding volatility to the euro just as the recession begins to rachet down. Now the news reports are talking about a double dip recession in Europe. Does anyone out there see an EU without Greece in the years ahead?

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Derivatives and Government Regulation

Posted by Jim Kelley at Feb 25, 2010 08:56 AM

The derivatives market still exists and that seems like a dangerous practice to continue. The fact that Greece was able to actually hide its true debt problem using derivative agreements and join the European Union should frighten everyone. That is not even considering the debt crisis that is ripping global economies apart. Yet the derivative transactions continue. There was an article buried in the New York Times a couple of months ago that discussed how banks are still participating in risky financial transactions through derivatives. These types of transactions don’t have to be stopped but maybe they do need to be regulated more. I say “maybe” because despite the crisis, I am not a fan of too much government regulation. But the thought of the big financial institutions being able to collapse the world economy through risky behavior is making me more willing to consider additional government oversight.

As the banks begin to slowly slide back into their old risky behaviors, you have to ask if they are simply operating for the good of a handful of people without any concern for their clients, the consumer or the economy. I don’t bash the bank CEOs like some people because I personally don’t have a problem with people making millions IF (big IF) their performance justifies the earnings. But I also want the ones making the millions to assume some losses if they fail miserably by creating bogus products like subprime mortgages. Current behavior already seems to show that the banks are going to simply go back to doing the same things that made this mess. I don’t see why derivatives cannot be traded on exchanges like other financial products. If they are good investments then there should not be anything to hide.