Currency Market Shifts Course Temporarily

Posted November 24, 2009

Columbian central bank cuts benchmark interest rates. The Chilean peso rallied as copper prices increased. The Brazil real also strengthened again on rising commodity prices. The UK pound rose against the U.S. dollar once again because of strong performance in commodity based stocks. The U.S. dollar strengthened against the euro. The Canadian dollar strengthened on rising oil and gold prices.


There was plenty of news concerning the currency markets yesterday as central banks and policy leaders continue to struggle with the recession. It seems there is a danger of a double dip recession if there were to be a serious economic misstep by any of the developed countries policymakers. That has brought a lot of uncertainty to decision making.

Yesterday, the Columbia central bank voted to reduce its interest rate by 50 basis points. This leaves the current benchmark rate at 3.5 percent. Columbia has been having a war of words with Venezuela concerning Columbia’s acceptance of U.S. assistance in fighting drug trafficking. The disagreement has led to a reduction in trade between the two countries thus hurting both economies.

In another part of Latin America, the Chile peso strengthened more yesterday than it has in 2 weeks. Commodity prices, including the price of copper, are rising attracting investors with risk appetite to Chilean assets. The peso strengthened to 492.65 pesos per US dollar which is a 1.8 percent increase. The central bank will be watching the peso rally closely in the event there is a need to purchase U.S. dollars in the market to slow the growth of the Chilean peso.

The Brazil real also strengthened as commodity prices rose globally attracting foreign currencies to Latin America.  The real strengthened to 1.7250 reais when paired with the U.S. dollar. The real has been one of the strongest performing emerging market currencies this year. The Brazil government is implementing measures to prevent currency appreciation beyond 1.7 real per greenback.

The UK pound rose against the US dollar for the first time this week which is also due to rising commodity prices. The FTSE 100 Index gained 2.4 percent as prices of commodity based stocks increased.  Sterling reached $1.6622 against the U.S. dollar. It also rose to 148.20 yen per pound.

The UK economy is showing signs of improvement with the third quarter GDP contracting .3 percent. But clearly the recovery is in its most fragile stage.

The U.S. dollar rose against the euro as the impact of the coming holidays on investor strategies is felt. Investors are warily watching asset performances as year end approaches and are closing out short positions. The U.S. dollar strengthened to $1.4944 against the euro.

The yen also rose against the euro to 132.77 yen per euro.

The U.S. government issued revised third quarter GDP figures showing a weaker economy than previously reported. The GDP expanded at 2.8 percent rather than the 3.5 percent previously estimated. Next year’s expansion could be as slow as 1 percent. This year’s growth has been largely due to government stimulus programs in the mortgage and auto sectors.

The Australian dollar weakened against the U.S. dollar to 92.12 U.S. cents. The weakening is largely due to investor loss of appetite for higher risk assets. The same is true for the New Zealand dollar which weakened to 72.83 U.S. cents.

The Canadian dollar strengthened against the U.S. dollar to C$1.0563. Gold and oil prices rose and those are two of Canada’s largest exports. Gold prices rose to $1,174 an ounce. Oil has risen to $77.62 a barrel for December future deliveries. Canada’s economy is showing signs of growth too with September retail sales rising by 1 percent.