Currency Markets Grapple With Fear

Posted May 24, 2010

The currency market on Monday was once again wrapped in fear. Over the weekend, a Spanish bank failed, adding to the concerns of many investors.


Monday Euro

The euro on Monday was once again controlled by the worries of many investors over the euro zone’s financial strength. The entire worry stemmed directly from the rescue of a small and failing savings bank in Spain. The Spanish government was forced to rescue the bank, which only added to the concerns of investors. Interestingly, not many investors thought that this takeover of this small bank was a sign that the country’s financial sector could topple, but it still turned attention on the debt concerns.

What many investors were concerned with was not just that one bank failed, but that the euro zone debt problems could spill over into the private sector in many of these countries. If this occurred, that could lead to further complications with a global recovery.

By the Numbers

During the trading session on Monday, the currencies moved with concern behind them. The euro moved from US $1.2583 as of late Friday trading to US $1.2392. The euro moved from Y 112.80 as of Friday to Y 112.10 by afternoon trading on Monday. The US dollar moved from Y 89.64 to Y 90.48. The UK pound moved from US $1.4445 to US $1.4443 during the day’s trading as well. The dollar moved from CHF 1.1480 to CHF 1.1578 during the trading session. The ICE Dollar Index moved the US dollar from 85.348 to 86.247.


Also in the currency picture during Monday’s trading session was China. In particular, investors were watching to see what the Chinese government would do as the Yuan appreciated. All eyes were on the appreciation of the currency after a 2 day United States and China Strategic and Economic Dialogue. This dialogue began on Monday. To investors, the revaluation of the currency could cause ripples in the country’s economy. Most see China as the engine of the global economy and any stalled growth here could be problematic for the world economy. China is considering revaluing the country’s currency as a way to slow the growth of the Chinese economy, which it believes is moving too fast. If this occurs, it is likely that the currency traders will move to the safe haven of the yen. This is according to some investors in the market.

US Information

Also important during the Monday currency trading session was the announcement from Timothy Geithner who is the United States Treasury Secretary. He said in remarks that China should allow for the currency to allow a change. Specifically, he stated that the exchange rate needed to better reflect the market forces. This came with reassurance from the Chinese President, H Jintao when he stated that he pledged to continue to reform the country’s exchange rate regime. This information helped to give some reassurance to investors that there is not a black hole of risk involved.  Nevertheless, the Chinese yuan’s value will continue to be something investors monitor.