A Brave New Currency World

Posted January 09, 2009

The yen has strengthened against all major currencies as investors seek safe haven again. The deepening global recession is causing increasing market concerns.


The big question plaguing the financial markets is what to expect next in the way of bad news.  It seems there is no end to the severity of economic downturns.  Every time investors think they are prepared for the worst…it actually gets worse.  In the US, for example, the reported jobless rate was grim with another 524,000 lost jobs and a national unemployment rate of 7.2%.  

President-elect Barack Obama's stimulus package proposal is already in trouble too due to tax cut opposition.  But what is interesting to note about this opposition is the fact it reflects the growing uncertainty in the financial markets as to whether past monetary policies are still relevant. What if the old rules of play have become useless in the new order of things?  In the US, Great Britain, China, Russia and many other countries there is increasing speculation that what has worked in the past may not work in the future.  Just ask yourself this question: Who would have ever expected benchmark interest rates to reach near or at zero percent interest?  

Speaking of interest rates, the emerging markets are using interest rate cuts for stimulus purposes also though their lending rates are still way above zero.  For example, Chile made a surprise announcement yesterday it was reducing the country's benchmark interest rate to 7.25%.  This was seen as a positive move in the currency market, and the peso strengthened against the US dollar to 616.75 pesos per dollar.  Investors interpreted this rate cut as a sign the Chilean government is in control of the economy and ready to take steps to minimize the collateral damage from the recession. 

The US dollar strengthened against the euro despite the staggering jobless rate.  One reason is that many investors believe December figures represent a high point in terms of numbers and the number of lost jobs should begin to decline in January.  January figures are going to be critical as far as providing some clues as to whether the government anti-recession actions are really going to be effective.  Is past monetary policy going to work in this brave new economic world?

The dollar strengthened to $1.3702 against the euro by late yesterday and is still climbing as of this writing.  On the other hand the dollar fell against the yen to 91.20 yen per dollars or $.0109 in US dollars. 

But the yen rose when paired with all the major global currencies including the Australian dollar (JPY 63.54) and the euro (JPY125.15).  

On the other hand, the Australian and New Zealand dollars strengthened against the US dollar in response to the increasing unemployment rates in the US.  The US jobless figures led to a weakening of the US dollar.  The Australian dollar strengthened to US $.7096 and the New Zealand dollar strengthened to $.5929.  This strengthening is not expected to continue though as the global export market continues to weaken. 

It is a very difficult economic picture to interpret right now.  There are indications investors are selling off higher yielding assets and retreating back to the sidelines to see what happens next before risking additional money.  That is one reason the Japanese yen is increasing. Investors are paying back their lower cost loans using yens.  The Japanese benchmark lending rate is at .1%.

There was a cartoon in the paper in which the banker was offering to pay the consumer to take out a loan.  Now there's a radical idea to keep in mind…negative interest rates.