China Monetary Policy Tightening Impacts Global Currencies

Posted January 20, 2010

The US dollar rose against the euro and remained stable against the yen. The Japanese yen also rose against the euro. The Brazil real weakened again as the economy draws back after China’s monetary policy tightening. The UK pound weakened against the US dollar despite signs the economy is improving. The Mexican peso weakened against the US dollar. The South African rand fell after reports November retail sales fell more than estimated.


The US dollar strengthened to $1.4106 when paired with the euro. The Japanese yen also rose against the euro to 128.68 yen. The US DOW experienced a 122 point drop today on less than desirable earnings reports issued by large companies including IBM and Morgan Stanley.

The disappointing earnings reports drove investors to safer assets which naturally led to stronger US and Japanese currencies. The euro continues to drop as Greece’s debt and deficit problems remain unresolved.  There are many reassurances coming from the International Monetary Fund and the European Union that Greece will not default on its debt. A default on debt within the Euro-Zone would have enormous implications for the euro’s value and stability.

The US dollar remained stable against the yen at 91.23 yen per dollar.

China is in the process of tightening its monetary policies to dampen rapid growth. China’s growth rate is already over 10 percent. Banks were asked to increase their reserve requirements and slow down lending.  A slowdown in China’s growth will impact Asian and Latin American countries with heavy exports to China. Also impacted is Australia and New Zealand.

The Brazil real weakened to 1.7930 reais per US dollar. Brazil’s economy experienced a job loss in December after 10 months of job creation.

The UK pound weakened against the US dollar after two days of gains. The UK pound fell to $1.6279 against the US dollar. The UK economy is recovering at a faster pace than anticipated and the first signs of inflation have appeared. The December inflation rate rose by 2.9 percent compared to December of the previous year. In addition the unemployment rate declined at a faster than anticipated rate.

Despite the signs of an improving economy, the Bank of England is unlikely to raise interest rates until the third quarter of 2010. One of the issues facing policymakers is determining if the economic recovery signs indicate a solid recovery or are anomalies in an uncertain recovery. Withdrawing stimulus programs too soon and too rapidly could jeopardize the economy’s ability to grow.

Bank of England Governor Mervyn King has expressed concern about the country’s staggering debt and its impact on the sustainability of recovery. The blending of fiscal and monetary policies may prove to be difficult if the deficit continues to climb.

The Canadian dollar fell to C$1.0465 against the US dollar. One Canadian dollar currently purchases 95.55 US cents. Oil prices retreated to $77.62 per barrel for February delivery. Gold prices have also fallen to $1,111.30 per troy ounce. Crude oil is Canada’s biggest export.

Canada’s inflation rate is holding steady at 1.5 percent.

Russia has acted on its promise increase its holdings of non-USA currencies in reserve accounts. Russia’s central bank made a purchase of Canadian dollars but the amount is not yet known.

The Mexican peso weakened to 12.7648 pesos per US dollar. The peso’s decline is largely in response to China slowing down its rate of growth by reducing bank lending.

November retail sales in South Africa fell faster than anticipated. Sales fell by 6.6 percent. In response, the rand fell to 7.5230 rands per US dollar.  Economic recovery has been slow in Africa’s largest economy.