Posted November 30, 2008
The coming week will once again see changes in global interest rates which will affect currency rates. The US dollar continues to depreciate while the Russian ruble posted its biggest weekly decline.
The Russian ruble is topping currency news, because it posted a big decline against the euro. In fact, it is the biggest decline the ruble has seen against the euro in five years. Unlike most countries which are lowering interest rates, Russia has chosen to increase rates for the purpose of discouraging foreign investors from pulling their capital investments.
The Russian ruble weakened by 1.6% against the dollar. It ended November at 27.86 rubles per US dollar. It also weakened against the euro to 35.527. Like most of the other countries around the world, Russia is suffering economically in response to the shifting of investor funds. Investors have been moving capital in response to changing interest and currency rates and also due to the large swings in equity markets.
Russia felt it had to raise interest rates, because investors have been pulling their capital out of the country. It is estimated that over $190 billion has been drained to date. But Russia is not the only country still trying to arrest significant economic declines, and it is not the only country having to raise interest rates to prevent a continued capital flight. Besides Russia, the countries of Serbia, Iceland and Pakistan are also raising their borrowing costs. The increase in rates is part of an effort to prevent an exchange for US dollars.
Iceland especially continues to grapple with a collapsing financial system. Though the International Monetary Fund has loaned the country billions of dollars, the entire Iceland banking system was dependent on foreign investments. When investors began pulling their funds, the banking system neared collapse and is still on a credit watch. The problem is long from being solved. In this year alone, the Iceland króna has fallen 22% against the euro.
The Australian and New Zealand dollars are still on the move too. The dollars of the countries have been weakening against the US dollar. The Aussie ended November at $.6532 against the US dollar while the New Zealand dollar weakened to $.5476. Both countries are expected to reduce interest rates this week in another attempt to jumpstart their economies. Like in the United States, the economic reports show continuing increases in joblessness and decreases in output and exports. The Bank of Australia has made 3 interest rate reductions already and the fourth will most likely lower the rate to 4.5%. The New Zealand interest rate will drop to 5%.
The US dollar weakened again against the yen as of 30/November/2008. The yen had strengthened to $.0104 in US dollars. The euro also weakened against the yen. The stronger yen is partly due to speculation that Japanese investors will begin to repatriate their funds while seeking safe haven. Japanese investors are quite patriotic and will make investment decisions that benefit their country as much as they benefit individual investors.
Also there is speculation is that the European Central Bank is going to significantly reduce interest rates once again. The recession in Europe continues to deepen despite the massive amount of cash which has been injected into the economies. What is more worrisome is the fact that the deterioration seems to be accelerating making it difficult to respond in a timely manner with new financial programs.
Continuing a trip around the world, the emerging market currencies are also making news. The Turkey New Lira strengthened against the US dollar to $.6400. The Brazilian real strengthened to $.4340. The South African rand rose to $.0984.