Collective Sigh of Temporary Relief

Posted March 10, 2009

US equity markets soared leading to a sell-off of the dollar. The UK pound continued to weaken against the euro as the sale of houses fell to a 1978 low.


Citigroup pronounced yesterday, 10-March-2009, the company would make a profit for the first 2 months of 2009.  You could almost hear the collective sight of relief in the financial markets though it might be temporary.  This is the same company that was close to being the first bank in the US to be nationalized.  It was only a couple of weeks ago the market dove on the news the US government was willing to take a less than half stake in the bank to prevent its failure.

One thing almost everyone agrees on concerning the recession is this: fortunes can change from day to day based on single pronouncements.  This is just proof lack of confidence in the financial markets rules.  But with the Citigroup news, the Dow Jones Industrial Average soared by 379.44 points to 6,926.49 and brought along the FTSE 100 (up by 172.83 points) and the NIKKEI (up by 283.18). 

The Citigroup news led people to believe the banking industry is ready to begin a turnaround.  Could it be true?  No one knows for sure which is somewhat astonishing in itself after so many months of recession.

But the stock market rise led to a sell-off of the dollar.  With the bit of confidence in the banking system came less demand for investing in the safe haven US currency. The US dollar weakened against the euro to $1.2692 and against the yen to 98.74 yen per dollar.

The US dollar also weakened against the Australian currency to 64.71 US cents per loonie and against the New Zealand dollar to 50.50 US cents per kiwi.

The UK is still waiting for some good economic news.  The bad news just keeps flowing and yesterday came the news that Britain’s housing sales are at 1978 levels.  In addition, factory production declined 2.9% in January.  The production contraction is the largest the country has seen in 40 years.

The UK pound weakened against the euro and the dollar as the Bank of England begins implementing its policy of quantitative easing.  The pound fell to 92.33 pence per euro and to $1.3784 in terms of the US dollar.  Unlike in the US, there have been no signs of recovery in the UK banking industry.  This is putting continued downward pressure on sterling.

The South Korean won strengthened against the US dollar also to 1,506.5 won per dollar.  The rise in the won is credited to the government’s willingness to intervene in order to support the currency using its foreign exchange reserves.

Japan is battling a still deteriorating economy led by a collapse in its exports.  Machinery orders fell 4.8% in January and the GDP fell by 13.4% in the fourth quarter of 2008.  It is expected the yen will continue to fall against the euro on the grim economic news after weakening yesterday to 125.32 yen per euro. 

Hungary has been aggressively addressing its debt problems ever since Eastern Europe was denied bailout funds by the Economic Union.  The Hungarian forint strengthened against both the euro and the US dollar.  It rose to 304.80 forints per euro and 238.35 forints per US dollar.

The US dollar might continue to weaken against global currencies if the signs of banking strength in the US hold up over the coming days.  When investors stop seeking safe haven, the US dollar is usually the first currency sold. 

The US Federal Reserve Chairman Ben Bernanke said the US recession would turn around by the end of 2009.  Unfortunately he did not provide any details as to why he is now making this claim.  Perhaps he will give investors more information soon.   Some believe he might just be talking in a more positive manner in order to inspire market confidence.