Currency Markets Remain Volatile as Economic News Remains Mixed

Posted September 30, 2009

The US dollar rose and yen rose against major global currencies as the economic recovery shows signs of faltering. The Eastern European currencies showed mixed results with the Polish zloty falling while the Czech koruna strengthened. The Swedish krona has weakened for 5 straight days.


US consumer confidence declined in September to 53.1 reflecting a public’s disbelief the recovery is accelerating as unemployment continues to rise.  As a result the US dollar strengthened against the euro and the UK pound as investors retreated to safe haven assets while digesting the economic news.

Analysts are not pretending some confusion over the rising equity markets even as companies refuse to add employees due to poor earnings performances.  The question is now whether stocks are over-valued based on economic conditions.  As investors move between equity and currency markets, volatility remains high.

The US dollar strengthened to $1.4571 against the euro and to $1.5958 against the UK pound.  The UK pound rose the most against the euro in the last three months reaching 91.04 pence per euro.  The UK economy continues to contract but at a slower pace.

The dollar rose to $1.4571 against the euro also and at one point reached a 2-week high.  Some economists believe the world’s economic recovery will not grow stronger as long as US consumer confidence is weak.

The yen has been strengthening the past 2 weeks and not everyone in Japan is happy about that since a stronger yen leads to fewer profits on export sales.  Yesterday the yen took a breather and fell to 90.21 against the US dollar.  At one point the yen had reached 88.24 against the US dollar which was the strongest it had been since the end of January 2009.

The yen also weakened against the euro to 131.44 yen per euro and all other major global currencies. The new Democratic Party of Japan opposes currency market intervention.

There has been a lot of discussion already about reducing the role of the US dollar as the world’s currency reserve.  Right now the dollar will retain its favoured status but in 10 years that may not be the case.  Just today China has announced plans to establish new trade partnerships with African nations using the yuan as the settlement currency.  The US has also been warned by the World Bank and some members of the G-20 to not assume the US dollar will remain as the global trade currency over the long term.

For now Russia has said it will maintain its purchase of US Treasuries at current levels.  US President Barack Obama has been working with Russia to re-establish a better international relationship. But the fact is there are not a lot of alternatives right now to the US dollar as a trade currency.

Developed nation central banks have decided the signs of economic growth are not strong enough to enable governments to withdraw stimulus funds.  There will have to be exit strategies implemented at some point soon but not yet. The European Common Bank has a plan ready to go, as does the Bank of England, but neither are able to put them into place yet.

In Eastern Europe, the Polish zloty weakened to 4.2457 against the euro which is a 2-week low.  The Romanian leu rose to 4.1904 leu against the euro.  The Hungarian forint fell to 270.21 forint per euro. The Czech koruna rose to 25.175 koruna per euro.

The Swedish krona has weakened for 5 days straight against the US dollar.  The krona fell to 7.0224 krona per US dollar.  Sweden continues to battle the recession and retail sales fell in August by 2.1 percent compared to July 2009. The krona also fell against the euro to 10.2145 krona per euro.