Currencies Volatile as Economies Falter

Posted July 05, 2009

France entered the debate concerning the need for a new world currency. Canada’s dollar weakened as crude oil and commodity prices fell. The yen strengthened against most global currencies as investors seek to reduce risks.


As has been discussed, the Chinese call for a new world currency composed of a basket of currencies has been relentless.  From China’s viewpoint, the persistence is paying off because first the International Monetary Fund publicly addressed the matter and now France has joined the debate.

China is already beyond the discussion stage and has been taking steps to internationalise its currency.  In the most recent move it has agreed to let designated companies settle their import/export transactions in renminbi using certain Chinese financial institutions.  Though this agreement does not directly impact the US dollar, it is yet another indication that China believes the global trade market should not be relying on the US dollar.

Mr. Stephen Green with Standard Chartered in Shanghai summed up China’s viewpoint in the following succinct manner.  He said, ““To many minds in China the US dollar’s time is almost up, the Eurozone suffers from political paralysis and a too-conservative central bank, while two decades of economic stagnation and a shrinking population do the yen no favours.  For them (the Chinese), the renminbi is an obvious, and imminent, replacement.”

In France, Finance Minister Christine Lagarde and the Bank of France Governor Christian Noyer entered the country into the debate concerning the future of the US dollar as a world reserve currency.  France is indicating at this point it believes the discussion is valid.  The Group of Eight Is meeting in several days in Italy and it is expected there will be some discussion of this issue.  Russia and India are already supporting the call for a more stable currency reserve that is not dependent on a single big currency.

Naturally, such a change will take time but it is interesting to note how quickly China is acting to arrange cross border agreements using the yuan.

It is understandable why there would be a call by some countries for a new trade currency as countries continue to deal with the global recession.  Now often called the ‘great recession’, it persists despite massive stimulus spending by governments that is creating enormous debt levels.  As a result, investors are frequently turning back to the safe haven assets for security.

This strategy of investment protection resulted in a strengthening of the Japanese yen against the euro and the US dollar over the weekend.   Credit markets continue to experience rising losses in both the US and Europe and Asian stocks fell forcing investors to once again move to safety. 

The yen rose to 133.29 yen against the euro and to 95.44 yen per US dollar.  The yen also rose against the Australian dollar to 75.65 yen per Aussie and to 59.77 yen per New Zealand dollar.  This was the third straight day the euro has fallen against the yen.

The UK pound weakened against the dollar to $1.6281.  The UK continues to experience economic contraction with numbers showing 2.4 percent GDP contraction in the first quarter of this year.  The purchasing managers index fell in June to 44.5.  May’s index was at 45.9. 

The pound fell to 85.81 pence per euro and to 156.72 yen per pound.  The UK government plans on continuing its policy of quantitative easing through the expected purchase of 3.0 billion pounds of additional debt.

Canada’s dollar fell as crude oil prices continued to decline to $65.61.  As commodity prices fall, so does the loonie.  The Canadian dollar weakened to
86.08 US cents.  The US figures showing June joblessness rose by 467,000 claims put downward pressure on Canada’s dollar because the country is heavily reliant on exports to the US.

The currency market is expected to be volatile this week and will respond to equity market moves.