A Post-American Controlled Market?

Posted March 24, 2009

The UK pound showed surprising strength after February inflation was reported at 3.2%. The US dollar and yen rallied a bit against most major global currencies more as an adjustment offsetting the Monday declines.


A mere six months ago people would have laughed heartily at questions concerning the security and value of the US dollar.  That was before current President Barack Obama proposed a US budget that relies on $3.6 trillion dollars of debt.  It was also before the collapse of the mortgage industry and the creation of toxic assets which have the credit market locked up tight.

As the US dollar proves its vulnerability by falling after the US initiated a policy of quantitative easing last week, China is happy to step up its campaign to get a new global currency reserve.  Referred to as a “Super Currency”, it reflects China’s and other countries’ concerns over the US dollar weakness.  China is making very aggressive and pointed statements concerning the US debt and currency values and seems to be enjoying the US discomfort. 

It’s difficult to fault China since it currently funds 40% of the US debt through the purchase of US securities.  The US is now the world’s biggest borrower because of its debt and that is seen as a symbol of its excesses.  China is not the only country making it clear the US no longer rules the financial roost.  Germany, Sweden, the UK and others have told the US they will concentrate on salvaging their own GDPs and financial institutions and are not interested in a global solution controlled by the US. 

The UK got some surprising news on 24-March-2009.  Inflation rose to 3.2% in February despite fears deflation would take hold.  It seems that the weakening of the pound over the past months has been passed on to the consumers.  As a result, prices for goods and services rose.  In addition, the UK consumer price index rose .9%.

When the news of the inflation rate was published, the pound strengthened against the US dollar to $1.4690.   It also gained against the yen to 143.90 yen per sterling and to £.9216 pounds per euro.

In Japan, the plans are to lower long-term yields which will put pressure on the yen in the future.  The Bank of Japan intends to prevent a period of deflation such as the country experienced during its last prolonged recession.  The yen weakened to 97.93 yen per US dollar.  It strengthened against the euro to 132.64 yen per euro having hit a 5-month high against the yen on the same day at 134.50 yen per euro.   The yen strengthened against the Australian dollar also to 67.87 yen per Aussie.

The dollar did rise against the euro to $1.3453 US dollars per euro yesterday.  It was interesting to note that US President Obama made a point of commenting that the US dollar is still strong in his Tuesday night press conference.  It makes you wonder who he is trying to convince – himself, the American public, or the international financial community.

The G-20 meets in London on April 2.  The issue of currency values and the status of the US dollar will be discussed among other topics such as toxic assets.  Though the US Treasury Department has announced a plan for cleaning up toxic assets, not a single person knows if it will work.  There are hedge funds already showing some interest in the public-private investment option, but on the other hand, hedge funds are worried about the government’s overtures concerning hedge fund regulation.

It is safe to say the US dollar will remain the world’s reserve currency…for now.