Dancing the Currency Limbo

Posted December 15, 2008

There is much discussion concerning the record low sterling has reached against the euro. The uncertainty over the US auto bailout is impacting currency rates in several countries.


 When you dance the limbo, the question is, “How low can you go?”  The British pound and the dollar must be dancing the limbo, because both are reaching new lows.  The dollar has fallen to an 8-week low when paired with the euro.  The sterling has weakened significantly against the euro, falling by 22% since the beginning of the year.

This dance of the currency limbo for the US dollar and British pound is happening for a couple of reasons.  The US dollar fell to $1.344 against the euro mostly because of concern over the auto bailout.  The financial trouble that General Motors, Ford, and Chrysler are having seems to be an endless saga that has no easy answers.  The best and brightest in Washington, DC cannot determine if any of the 3 auto companies will survive even if a massive loan bailout program is passed.  The US taxpayers are bailout weary and the talk of more billions being poured into companies that have deep ingrained financial problems is making them unsupportive of more government funding being poured into a private businesses.   Of course, if you are an autoworker that statement does not hold true.

President Bush has announced the federal government is considering several options intended to assist the auto companies including using some of the original $700 billion bailout fund.  The most recent weakening of the dollar against the euro is related to investor belief that this US government auto assistance plan will lead to less financial system support.  In other words, money diverted to the auto companies is less money available for the financial system.

Of course, the investors may not realize the US Treasury printing presses are working as fast as they can to produce greenbacks.

The dollar fell against the yen as of Friday, 12/December/2008 but as of early Monday morning, 15/December/2008, was holding steady.  The yen remains at $.0109 in US dollars.  The yen fell against the euro, the Australian dollar, and the New Zealand dollar.

Japan is in a recession.  The Bank of Japan’s tankan survey revealed that business sentiment is at its lowest level in 7 years.  The big manufacturer and the big service-sector indices dropped according to the report. 

The sterling has weakened against the euro for a number of reasons.  The overriding reason, of course, is the continued deepening of the UK recession.  Another factor impacting the pound rate is the increasing UK budget deficit.  The British pound had fallen to 89.97 pence against the euro as of Friday, 12/December/2008.  This represents the lowest the pound has seen against the euro since the euro was introduced in 1999.

In Canada, the dollar has fallen against the US dollar because of the auto bailout program failure.  When the US Senate did not pass the loan legislation, the price of crude oil dropped.  Since oil is one of Canada’s primary exports, the falling oil price has caused a weakening of the Canadian dollar ($.8019) when paired with US currency.  

In other news, one of the biggest US securities brokers was arrested for running a Ponzi scheme.   Bernard L. Madoff used to be the chairman of the NASDAQ Stock Market.  He was considered to be one of the most successful brokers on Wall Street and his arrest came as a shock and added to investor concerns about the current state of the US financial markets.  The DJIA was expected to respond to the news negatively, but there was actually a slight increase of 64.59 points to close at 8,629.68 as of Friday 12/December/2008.  If Madoff was dancing the limbo, his back would be touching the ground.

So the limbo dance continues with global recessions and some currency rates still trying to find the low points that won’t lead to a total collapse.