Currencies React to Realization of Economic Truths

Posted June 03, 2009

The yen fell against the US dollar as investors gained more confidence the US will be able to manage its debt. Canada's dollar weakened as it adjusts to commodity price changes. The UK pound fell against the US dollar as equity markets fallback.


The yen fell against the US dollar (96.19 yen) as the US Federal Reserve Chairman Ben Bernanke told Congressional members that the US budget deficit must be managed to avoid creating financial instability.  Also, Fitch Ratings indicated the US AAA credit rating is safe.  As a result of this information, investors gained some confidence and abandoned the safe haven assets.

The yen also weakened against the Australian dollar (77.37 yen) and the New Zealand dollar (61.29 yen).  The euro strengthened against the yen too because Fitch Ratings expressed the same confidence in the UK AAA credit rating as it did in the USA rating.  At the end of the day Wednesday, the euro had risen to 136.51.

The US dollar remained about the same against the euro at $1.4165 dollars.  The Euro-Zone GDP was reported to have shrunk 2.5 percent in the first quarter of 2009. 

The Canadian dollar weakened against the US dollar as investors responded to surging commodity prices with the belief recent dollar increases have been too much and too fast.  The loonie fell to 90.02 US cents after hitting an eighth month high on 1-June-2009 of C$1.0785.  Oil prices have been rising recently, but fell the last two days as prices readjust in the market.  Oil is currently at $64.95 a barrel.

The Canadian central bank will be meeting today, but expectations are the benchmark interest rate will stay the same at .25 percent.

The decline in the oil prices led to a weakening in several Latin American currencies.  The Argentina peso fell to 3.7435 pesos per US dollar.  The Chilean peso weakened against the US dollar to 566.75 pesos.   Also falling were the Peru sol (2.9772 sols) and Venezuelan bolivar (6.66 bolivars) when each were paired with the US dollar.

The UK pound weakened against the US dollar ($1.6291 dollars), the yen (156.36 yen), and the euro (86.67 pence).  The drop in the pound was largely due to the fallback in the equity market. Some analysts believe the stock markets are rising faster than is justified by economic conditions.

The European Central Bank meets today, 4-June-2009.  It is expected the ECB will keep interest rates the same.  The current rate is 1 percent which is a record low.   The central bank is also going to make economic projections for 2009 and 2010.

The Swedish krona weakened against the euro to 10.8750 krona per euro.  It also weakened against the US dollar to 7.7044 krona.  The significant decline in the krona was due to concern over Latvia’s indications it might devalue the lats.  Latvia had no bids on a Treasury bill auction it was holding to raise money to pay debt.  A devaluation of the lats would jeopardize the loans Swedish banks hold.

Norway’s krone weakened against the euro and US dollar.  Norway is still experiencing a deepening recession.  The krone fell to 8.9730 krone per euro.  It weakened to 6.3238 krone per US dollar.

It is interesting to note that investors have been almost jubilant this week even with the recession still in force and companies like General Motors declaring bankruptcy.  Equity markets have been rising even as concerns over government debt around the world are growing.   US Treasury Secretary Timothy Geithner is in China right now reassuring the largest buyer of US Treasury bills that the US will be able to manage its budget deficit and the dollar is safe.

Some of the currency movements today were due to investors getting more realistic about economic and market conditions.