Currencies Fall in Advance of US Fed Meeting

Posted August 11, 2009

The US Federal Reserve meets on 12-August-2009 and many investors are waiting to see what is decided about interest rates. The Canadian dollar and Mexican peso weakened in advance of the meeting. The Columbian peso fell as oil prices dropped.


Anyone who wonders whether the signs of economic recovery are very uncertain can watch currency volatility before expected economic news announcements involving a large economy.  Investors are wary of any moves on the part of central banks and government treasury or finance agencies because market responses can still lead to big swings.

Right now investors are waiting for the 12-August-2009 US Federal Reserve meeting where US interest rates and other financial and monetary issues will be discussed.  Rates are expected to be left unchanged but there is no certainty of course.  The market is quite skittish and investors are moving to the sidelines and assuming a wait-and-see stance.

As a result the currencies particularly tied to the condition of the US economy weakened significantly against the US dollar.  The Canadian dollar was one of those currencies and it fell a 1.2 percent yesterday to 90.78 US cents or C$1.1015.  This is the fourth day straight the loonie has weakened.

The Canadian dollar also fell against the Japanese yen to 87.11 yen per dollar.

Also weakening was the Mexican peso which fell to 13.0238 pesos per US dollar.  This was partly due to uncertainty over the upcoming Federal Reserve meeting and the 2010 Mexican budget deficit.  The Mexican government’s budget has the largest deficit it has ever had in its history at 480 billion pesos.  A factor aggravating the situation is lower Mexican oil production reducing US dollar flows into the country.

Mexico must trim its budget or increase its revenues to cover the gap if the country is to avoid a credit rating cut by Standard & Poor’s.

The Columbian peso continued to weaken as oil prices drop again to below $70 a barrel.  Columbia is also having a disagreement with Venezuela involving the use of the Columbian military bases by the US.  The US is intent on stemming the flow of illegal drugs to the US and Columbia has welcomed assistance in battling the drug cartels.  Venezuela’s President, Hugo Chavez, is publicly critical of Columbia accepting US aid and allowing the US into the Latin American country.

Venezuela has signed an agreement with Argentina to purchase more Argentina and less Columbian oil.  The Columbian peso weakened to 2,045.28 pesos per dollar.  The Venezuelan bolivar strengthened to 6.83 bolivars against the greenback.  The Argentina peso remained about the same at 3.8304 pesos per dollar.

In other Latin American countries, currency news was mixed.  The Chile peso weakened for the fifth day in a row and is now at 547.7 pesos per US dollar.  The Peru sol strengthened to 2.945 sols per US dollar.

The Polish zloty made the news again as it fell against the euro more than it has in 2 months.  The zloty weakened to 4.1867 zloty per euro.  Poland is the only eastern European country that reported an economic expansion in the first quarter of 2009.

The Hungarian forint also weakened against the euro on speculation the central bank could cut the benchmark interest rate.  The interest rate reduction is a possibility because inflation did not increase as much as predicted.  Inflation is currently at 5.1 percent and the economist predictions were inflation would come in at 6.1 percent.

The UK pound did not change much and was at US $1.6497 late yesterday.  The support level is currently at $1.635