China Stabilizes and US Dollar Continues to Weaken

Posted July 22, 2009

The US dollar is acting as expected when recovery signs began to appear by weakening against most major global currencies. The Brazil central bank cut the Selic rate. The Canadian dollar strengthened again as oil prices and equity markets rose causing concern about the impact on the recovery.


The US dollar continued to fall against the euro as mixed activity in the equity markets kept investors occupied.  It’s easy to see that money is only being parked temporarily in safe haven assets as higher yielding assets lure investments.  Continued signs of improvements in global economies will put additional pressure on the greenback.

One of the defining characteristics of this recession has been the stubborn mix of signals making it difficult to get a handle on the situation.  For example, there are signs of economic stabilization in US housing and lending yet rising debt and unemployment is sure to extend the time it takes to recover.  Are financial systems truly stabilizing or did US Federal Reserve Chairman say that to soothe the market place?

Both the yen and dollar weakened against most major global currencies as the S&P 500 rose.  The US dollar fell to $1.4277 against the euro at one point which was the weakest level it has seen since 3-June-2009.  The yen was at 93.565 yen per US dollar. 

The South African rand benefitted from increases in gold futures prices.  August gold delivery prices are now at $951 per ounce leading to an increase in the rand to 7.6775 rand per US dollar.   The rand also rose against the yen to 12.12 yen per rand.

Brazil’s central bank cut its interest rate, called the Selic, by 50 basis points.  It is now at 8.75 percent with the bank hoping the reduction will stimulate the economy. 

The central bank issued a statement that read, "The committee believes that, at this moment, this level of interest rate is compatible with a benign inflation scenario and contributes to the convergence of inflation into its target along the relevant time horizon and the inflation-free recovery of economic activity.”

This will probably be Brazil’s last interest rate reduction this year.  The country’s GDP is expected to contract by .34 percent this year.

The UK pound fell to 153.92 yen per pound.  It was little changed against the euro at 86.41 pence per euro. The benchmark interest rate was left unchanged by the Monetary Policy Committee yesterday.   It is currently at .5 percent.

The UK government issued numbers yesterday showing an increasing budget deficit.  In fact, June’s increase was the highest deficit increase recorded since 1993.

The Swiss franc did not move much today and was at 1.0660 francs per US dollar.  It remained close to the same price against the euro also at 1.5159 francs per euro. Analysts are speculating that the Swiss central bank expects the franc to resume strengthening again in the near future.

The Swiss government chose to intervene in the currency market to slow franc appreciation.

The Canadian dollar strengthened against the US dollar to 90.90 US cents or C$1.1001.  At one point it reached C$1.0951 which had not been seen since 11-June-2009.

The loonie rose as oil appeared to be on the gaining side.  It was also responding to rising stock prices.  September oil delivery prices are now at $65.31 per barrel.

Canada’s central bank is concerned about the strengthening of the loonie because it is moderating the economic recovery which had been underway already.  May retail sales rose but the strengthening currency is offsetting gains.

China’s powerhouse economy is stabilizing and the government indicated exports could rise during the second half of this year. The renminbi has stabilized also and is at 6.83 yuan per US dollar.

China is working with emerging Asian countries to promote global trade expansion.  The country has assumed an ever larger role in the global export market.