Posted March 03, 2009

The US dollar and yen weakened as Australia left its benchmark interest rate unchanged in a surprising move. Canada’s dollar weakened also on news the country’s GDP is still in decline.


“Significant stresses” is how the US Federal Reserve Chairman described financial markets.  As the US Dow Jones Industrial Average dropped to a twelve year low and closed at 6,763.29 while the US dollar and yen weakened, the term “significant stresses” seems a bit of an understatement.  A 4.2% drop on one day in the equity market of an economic power is a breathtaking descent.

The global governments have decided they need to talk more cheerfully though in order to inspire market confidence.   They had better talk faster and louder though before people lose any more of their investment portfolio values and banks begin to fail at too rapid of a rate for even governments to fix.

Speaking of cheerful news-Australia’s central bank decided to leave the benchmark interest rate alone which was surprising to the markets.  This led to a bounce in the price of the Australian currency to 64.01 US cents.  The New Zealand dollar also strengthened against the US dollar to 49.66 US cents.

Of course, in the currency markets when one goes up another must go down.  Besides the US dollar weakening against the Aussie and kiwi, the yen also fell against the two currencies.  The Australian dollar strengthened to 62.39 yen per Aussie and to 48.38 yen per New Zealand dollar.

The current plan is for Australia to leave its interest rates at the current rate of 3.25%.  In more cheerful news, Australia’s retail sales increased in January when they were expected to decline and the 4th quarter 2008 GDP numbers to be released are to show an expansion of .2%.  That may seem very small, but any sentence right now that uses the word “expansion” instead of “contraction” is a cheerful one.  In other words, Australia is in better shape than many other economies.

The US dollar and yen also weakened against the euro to $1.2629 dollars per euro and 97.49 yen per euro.  Carry trades are turning to borrowing in the US and Japan with their zero or near zero interest rates and investing in the higher yielding funds such as those of Australia and New Zealand. 

In Canada, the news is not cheerful as the 4th quarter 2008 GDP figures show a contraction of 3.4%.  The view of Canada’s currency market is that of a weakened condition.  The Canadian dollar weakened to 77.47 US cents.  The central bank is expected to cut interest rates again tomorrow but that might not have much impact at this point.

The worst news yesterday was actually the news that the massive AIG insurance company needed a fourth bailout.  The company lost a staggering $61.7 billion in its most recent quarter.  Unregulated unsecured investments that bet against insurance losses and investments in mortgage backed securities have led to its financial crisis.  The problem is the situation gets worse and worse, and this particular company’s failure would reverberate around the world since it is an enormous global company. 

The US Federal Reserve Chairman Ben Bernanke is testifying in front of a Congressional banking committee.  He says that the taxpayers will have to continue to bailout AIG until the financial markets stabilise.  The collapse of AIG would deepen the recession in the US and Europe.

Some countries are enjoying cheerful news, but for the most part the financial news remains grim.  The currency markets remain more volatile than normal and the predictions continue to be strong the US dollar will dominate the currency market.  There is real concern that Eastern European countries are on the road to loan default which will also deepen the global recession.