Credit Losses Lead to Weakening Currencies

Posted April 21, 2009

Credit losses are increasing at banking giants like Bank of America and Citigroup, which led to investors returning to safe haven assets as fears the recession has not found bottom yet flare up yet again. The Australian and New Zealand dollars responded to the news by weakening against the US dollar. The Bank of Canada surprised analysts by cutting benchmark interest rate more than predicted.


As expected, the economic and business news being issued this week is increasing the currency market volatility.  Having a significant impact on currency values is the growing credit losses occurring in the banking industry.  As credit card and loan defaults, and the continuing high rate of mortgage foreclosures accelerate, there is concern banks are still facing issues that will need government attention including additional bailout money.  This dampens the appeal of riskier assets as investment vehicles.

The Australian and New Zealand dollars responded to US banking losses by weakening against the US dollar and yen.  The Australian dollar weakened to 69.66 US cents.  The New Zealand dollar fell to 54.88 US cents.  These are levels not seen since late March and early April of this year.

The Aussie also weakened against the yen to 68.20 yen, as did the kiwi which fell to 54.57 yen.

Asian currencies also weakened on concerns credit losses show continuing weakness in banks.  As investors turn to safe haven assets to reduce risk, the South Korean won fell to 1,349.25 won per US dollar.  This year alone the won has lost 6.6 percent against the US dollar.

South Korean economic growth is expected to slow 1.5 percent next year according to the International Monetary Fund.  As an emerging market, the recession has caused difficult and deepening credit problems at the government level which impacts key bond ratings.  South Korea was able to hold a successful bond sale yesterday though, selling 1 trillion won of 10-year bonds.

Also falling in response to US credit loss indications in bank profit numbers is the Taiwan dollar.  The Taiwan dollar weakened to NT$33.830 against the US dollar.  The weakening Asian currencies reflect the belief that a global economic recovery is still not on track.

There were some surprises in the currency market yesterday.  Sweden reduced its benchmark interest rate less than expected.  On the other hand, the Bank of Canada cut its benchmark interest rate to a new low against analyst predictions. 

The Swedish krona increased against the euro to 11.1364 krona per euro and against the US dollar to 8.5985 krona per dollar.  The government has indicated a willingness to buy government and mortgage bonds if the economy contracts at a rate higher than expected.  The interest rate is now at .5 percent.  The projected GDP contraction for this year currently stands at 4.5 percent.

The Norway krone also strengthened against the euro to 8.8043 krone per euro and to 6.7958 krone per US dollar.

The Canadian dollar fell to C$1.2462 or 80.24 US cents when paired with the US dollar.  The Bank of Canada cut its benchmark interest rate to a new low of .25 percent.  The bank also indicated that the GDP will contract by 3% this year and not the 1.2% predicted earlier.  There are now expectation a policy of quantitative easing will be instituted to attempt to resuscitate the economy.

In Switzerland, the central bank purchased 4.52 billion euros during the first three months of 2008.  The intent was to weaken the franc against the euro and other major global currencies.  The franc fell to 1.5104 against the euro and to 1.1682 against the US dollar.

The euro finally ended a three day period of weakening against the yen.  The strengthening was primarily in response to an increase in the German investor confidence level.  The euro also strengthened against the US dollar. 

The euro increased to 126.70 euro per yen and to $1.2935 euro per US dollar.  The US dollar reported at 97.92 yen per dollar.

It became apparent yesterday, as the US stock market experienced a significant loss after several weeks of gain, that investors had gotten ahead of the economic conditions around the world.  As banking giants Citigroup, Inc. and Bank of America Corp. report increasing credit losses, it is clear there is still a lot of instability in the financial industry.