Death By a Thousand Cuts

Posted March 02, 2009

The euro is weakening against the UK pound in response to the European Union's denial of aid to Eastern Europe. The UK has weakened to a 30 year low against the US dollar also as the recession looks for bottom.


The economic news around the world is a death by a thousand cuts to the financial markets.  The US equity market is continuing to seek historic lows but it's certainly not alone as the FTSE, NIKKEI and Asian markets dive.  The Japanese NIKKEI has fallen 4%.


Investors are seeking risk aversion right now leading to a strengthening US dollar.  Because there are still so many market uncertainties, risk aversion is expected to remain the investment strategy at this point.  What is interesting is that analysts are indicating the US dollar investment is a last-resort strategy.  It is not that markets believe the US is particularly capable of ending this recession through government action, but that the US stands alone as an economic power unlike the European Union.


The European Union leaders met over the last weekend.  Hungary and Poland had high hopes the meeting would result in Western European countries committing financial assistance to the Eastern European countries.  Hungary's forint has been plummeting against the euro reaching 299.75 forint per euro.  Poland has weakened to 4.6456 zloty per euro. 


The German Chancellor Angela Merkel was quite vocal about not giving broad financial support to any particular country.  Her logic was that each country in Eastern Europe has a unique financial status and a broad grant would be inequitable and non-productive.  Hungary, the most desperate, was asking for €240.84.  Hungarian consumers borrowed in euros to make asset purchases such as houses and now the houses have sunk in value.  Just like consumers in the US, they owe more on the houses than they are worth creating a financial meltdown in the Hungarian banking system.  Also hurting Hungary and the rest of Eastern Europe is the fall in exports.


The US dollar strengthened against the euro to $1.2663 dollars per euro and is expected to continue this trend in the near future.  The euro is headed downward on fears the lack of support for Eastern Europe is going to lead to an economic division between Western and European countries.  In fact, Hungarian Prime Minister Ferenc Gyurcsany has said the denial of broad financial support could lead to a "new Iron Curtain".  The wealthier Western European nations are creating stimulus packages that benefit their individual nations instead of the 27 nation Economic Union.


The euro also fell against the yen to 122.65 yen per euro and against the British pound to 88.39 pence per euro.  The pound remained stable against the US dollar at $1.4317.  The US dollar strengthened to 1.1700 Swiss francs and to C$1.2721 loonies per greenback.  The US dollar also strengthened against the yen to 97.60 yen per dollar.  In the near term, the US dollar is projected to reach 100 yen per dollar as the yen rapidly loses value due to the deepening recession. 


Asian currencies are declining as the recession continues to deepen globally.  The South Korean won weakened to 1,560.25 won per dollar.  The Indonesian rupiah fell to 12,175 rupiah per US dollar.  Taiwan's dollar also fell against the US dollar to NT$35.135. 


New Zealand's dollar weakened to a 6 ½ year low at one point the last couple of days.  It fell to 49.12 US cents per kiwi.  The New Zealand dollar also weakened against the yen to 48.06 yen per kiwi.


There is a lot of data expected to be reported this week including the US GDP contraction rate for February.  Right now the global insurance company AIG is in the headlines because the company reported a $60 billion loss and needs additional government assistance.  AIG has fingers in most economic pies around the world and its collapse would deepen the recession in many countries including the US and UK.