Currencies Respond to Good Economic News

Posted October 08, 2009

The currencies are moving as good economic news around the world confirms that recovery is underway. The euro reached a 2-week high against the US dollar. The UK pound, Canadian dollar and Brazil real all strengthened against the US dollar.


The European Central Bank and the UK Bank of England chose not to raise interest rates this week.  The good economic news coming out this morning confirms that recovery is underway.  Keeping the rates for a longer period of time will assure the recovery gets a firm hold before beginning an exit strategy.

As discussed yesterday, Australia is the first major economic power to raise interest rates. The rate was increased to 3.25 percent. The Australian dollar is at 90.38 US cents. The New Zealand dollar strengthened to 73.97 US cents.

Jean-Claude Trichet has said that the Euro-Zone jobless losses are slowing and the economy is stabilizing.  He used that word too – stabilizing.  Trichet is the European Central Bank President.  In addition, the US number of first time claims for unemployment benefits has also fallen to 521,000 for the past week.  This is all such good news though jobless rates are still abnormally high.

Will this be a jobless recovery?  It seems to be so.  Global businesses like Pepsico are reporting 9% profit increases without adding employees.  Businesses are lean and plan on staying that way.  Over the next 2 years there will be a clear shift in the labor force as the millions of unemployed move into new industries and positions. How this impacts the long term economies is yet to be seen.

Germany has reported a manufacturing output increase of 1.7 percent for August which was also good news. 
The currency markets are responding to the good news of course. Besides the increase in the euro against the US dollar ($1.4779), the UK pound is also strengthening against the Japanese yen ($142.146).  Japan’s recovery is proving to be slower than hoped as the US dollar weakens and affects export market action.

The UK pound has risen to $1.60559 against the US dollar. The quantitative easing program will be completed as planned and then the government can consider which exit strategies to implement.

The euro reached a 2-week high when it touched $1.4801 at one point. The euro has also strengthened against the yen to 130.457 yen.

Investors right now are bullish on the euro as the 16-nation economic union shows steady but slow economic improvement. 
The US dollar has been under pressure as the recovery progresses which is an action long predicted.  Though US Treasury Secretary Timothy Geithner addressed the G-7 and made a speech about maintaining a strong dollar, the US debt level is continuing to rise and the dollar continues to weaken.  If a national health care plan is passed by Congress, the debt will rise yet more. The most recent numbers indicate there is a $1.4 trillion US deficit.

Rising commodity prices are leading to gains in the Canadian dollar and the Brazilian real.  Crude oil prices rose to $70.58 for November delivery. Gold prices have climbed significantly and are now at $1,059.60 and rising.