Currencies Strengthen As Oil Prices Rise

Posted June 11, 2009

The global recession continues to ease leading to further weakening in the US dollar and Japanese yen. Oil prices rose to over $73 a barrel leading to a number of currencies to strengthen including the Columbian peso and the Australian dollar.


As the recession continues to ease, the safe haven currencies continue to weaken.  Both the US dollar and Japanese yen are looking at a loss for the week when paired with emerging market currencies and currencies in countries with higher interest rates. 

The US interest rate remains at zero and there is speculation it will be raised before the end of the year, but it is speculation only.  Though the US reported an increase in US retail sales, some of the increase was due to spin-off prices from the increase in the price of a barrel of oil to over $73. It is difficult to measure the condition of the recession which is why the US is being cautious about reacting too quickly to good economic news.

The US dollar weakened to $1.4111 against the euro and to 97.74 yen per dollar.  The dollar also declined against the UK pound, the Australian dollar and the New Zealand dollar.  The dollar traded at 81.76 US cents when paired with the Aussie and at 64.39 US cents against the kiwi.

Though the recession is easing, it has not begun to turn around yet.  The numbers such as industrial output show a decline in the rate of the downward trend but the global economies are still falling.  The World Bank issued a projection that says it expects the global economy to contract to 3 percent for 2009.  The European industrial production dropped by 19.8 percent in May which is less than the drop experienced in April but at almost 20 percent it is clear the recession is still causing economic damage.

The rise in oil prices was largely responsible for the strengthening of the Canadian dollar to C$1.1028 against the US dollar.  Oil is Canada’s primary export.

The Columbian peso continued to strengthen also due to the increasing price of oil.  The peso strengthened to 2,015.92 pesos per dollar which means the peso has already gained 10.3 percent this month.  This rate makes it a leader among the emerging market currencies of which there are twenty-six.

Also benefiting from improving economic conditions is the South African rand.  The rand strengthened to 7.9808 rand per US dollar and against the euro to 11.2562 rand.

The UK economy is improved to the point where the National Institute of Economic and Social Research projected the economy would begin to expand in the third quarter of 2009.  The pound rose to its highest 2009 rate against the euro when it reached 85.01 pence per euro.  The pound also rose against the US dollar to $1.6556 and the yen to 161.98 yen per pound.

The Bank of Japan is meeting next week and the expectation is that interest rates will be left unchanged and monetary policy untouched.  The Bank will probably play a bit of wait-and-see as economic news shows signs of improvement.

China’s economy is quickly picking up speed.  The National Bureau of Statistics reported that industrial output increased to 8.9 percent in May.  The April figure was 7.3 percent.  In addition, China’s retail sales are growing which are offsetting the export declines.  China has implemented a stimulus plan which involved injecting 4 trillion yuan into the economy.

China has been publicly pushing for a new world reserve currency that does not rely on a single currency.  Right now the US dollar is the base global currency.  The US does not feel there is a good alternative at this point, but countries like China, Russia, and Brazil have joined the chorus.  Even if the currency market were to covert to a non-US dollar reserve currency, it could take many years.