Deep Pockets With Holes

Posted February 09, 2009

The UK sterling continues to strengthen against the dollar as investors begin to shift to a more positive outlook for the country’s economy. The euro fell against the dollar, on the other hand, as borrowing becomes more difficult in the financial markets. US President Obama pushes for passage of a new stimulus bill.


The global economies seem to have very deep pockets with big holes in them.  There is a call for more and more government intervention into financial markets.  The US is currently in the throes of a vigorous debate over a new $827 billion stimulus package which is being pushed by President Obama.  The new president said his goal is to spend enough money to save 4 million jobs, though there are already questions concerning how you measure saved jobs as opposed to the number of jobs lost. 

In China, Russia, Norway, Japan, and most other countries around the world, the pockets are just as deep.  The reason they are deep is the fact the recession just continues to get worse and financial conditions are still deteriorating.  For example, just as predicted, there are governments that are already having a difficult time borrowing money in the financial markets to fund debt.  The credit markets at both consumer and business levels remain locked up.

The euro weakened against the US dollar and the yen as a result of these borrowing problems.  For example, Russian banks are indicating it might be necessary to reschedule foreign loans to the tune of $400 billion.  European financial markets are impacted more by these kinds of problems then the US or Japanese markets.  The euro weakened to $1.2873 against the US dollar and to 117.86 yen per euro. 

The US dollar strengthened against most major global currencies on the belief the US Senate will pass the stimulus package being debated.  In addition, Treasury Secretary Geithner is expected to announce a new “bad bank” plan that will include both government and private investor purchases of bad bank assets.   Aggressive actions such as these would be interpreted by financial markets as a sign the US may be able to reverse the recessionary trend faster than other countries around the world.

The UK pound did strengthen against the US dollar, because the UK government has been making its own bold stimulus announcements letting the country know it is ready to do whatever it takes to improve the economy.  Also, an improving US economy would have a positive global impact so increasing confidence in the new US stimulus package is having a positive effect on the pound.  Sterling rose as high as $1.4935 against the dollar on Monday in London.

Other major global currency moves included the Australian and New Zealand dollars and the Norwegian kroner.  Norway has announced a new NKr100bn stimulus plan intended to loosen credit and increase consumer spending.  The kroner rose to $.1501 against the US dollar.

The Australian dollar fell against the US dollar to US$.6689.  It also weakened to 60.96 yen per Aussie.  The reason for the weakening is the same as that for the euro.  The Russian debt rescheduling has created financial markets concerns involving covering the massive debt governments are going to need to cover as a result of stimulus packages and weakening economies.

The New Zealand dollar also weakened against the US dollar to US$.5311 for the same reason.   Australia, New Zealand, and much of Europe are closely tied economically to the health of the Russian and Asian economies. 

When the US Treasury actually announces the new “Financial Stability and Recovery Plan”, it is expected the equity markets will rise.  This is the plan which proposes how to spend the last half of the original TARP funds.  The Treasury plan will recommend creating an aggregator bank and what it will be collecting are bad assets now sitting on bank balance sheets. 

In theory, if the bad assets are removed, banks will be free to lend once again.  When equity markets go up…currency values tend to weaken.  So right now it remains to be seen which currencies will fill which pockets the fastest.