Economic Malaria

Posted December 16, 2008

The US dollar has weakened to a 2-month low against the euro. The British pound recovered some loss against the euro.


The health of many global economies remains poor.  The financial doctors, or government finance leaders, don’t really seem to know how to reduce the fever which afflicts consumer confidence.  Of course, it certainly does not help when the Wall Street money manager Madoff Ponzi Scheme spread to European banks as more details come to light.  Investor confidence in the financial markets was dealt another serious blow by the revelation of the extent of this pyramid scheme. 

Banks which have indicated they will be affected by losses from Madoff’s scheme include Great Britain’s HSBC Holdings, the Royal Bank of Scotland Group, Grupo Santander in Spain, Japan’s Nomura Holdings, and BNP Paribas in France.  It makes you wonder what other schemes in the US and elsewhere have not been brought to light yet.

The fact the news came out of the US is distressing to markets considering it was the US sub-prime mortgage market collapse which started the global economic crisis.  Some investors believe there is a beginning of a bull run on the equity markets taking shape, but in the meantime the growing concern over the state of the US economy is causing a weakening against the euro.  The repatriation of the dollar has slowed which is also leading to the price decline.  As a result, the US dollar has weakened to a low against the euro on 15/December/ 2008 not seen in 2 months with the euro coming in at $1.3665 by the end of the day.

The US Federal Reserve is expected to reduce interest rates yet again in an attempt to slow down the deepening recession.  If the Fed does what is expected, the US benchmark interest rate will drop to .5%.  Unfortunately investors are seeing these actions as reactionary rather than proactive.  In other words, investors are now looking at these kinds of actions as non-events rather than as solid financial decisions which will have a positive impact.

The illnesses which are afflicting the economies around the world are kind of like cases of malaria right now.  There doesn’t seem to be a cure and bad news can flare up at any time with little notice.  The good news is that some believe the US equity markets are ready to begin rising just because investors are tired of reacting to government announced news.  Now they want to buy undervalued stocks, and when the stock market goes up, the dollar rate tends to come down.

All the bad economic news which continues to flow from the US is causing the dollar to drop against many of the major currencies.  The dollar weakened against the yen ($.0110); the Canadian dollar ($.8075); the Australian dollar ($.6650); the Swiss franc ($.8619); and the British pound ($1.4946).

Speaking of the British pound, sterling continues to weaken against the euro as the UK recession deepens.  The UK housing prices continued to fall sharply which indicates the recession will be longer and deeper than originally believed.  But the pound did recover some of its recent losses against the euro.  The weakening dollar has propped up the pound to £.8895 as of 15/December/2008.

Russia is busy trying to defend the ruble through gradual devaluation.  The ruble has fallen to 37.677 against the euro which represents a 4 year low.  The Russian central bank has been draining its reserves in an attempt to stop the continued decline of the ruble against the US dollar which makes up part of the dollar (55%)/euro (45%) basket against which the ruble trades.  The trading band has been widened 6 times since 11/November/2008 by Bank Rossii.

It is hoped the financial doctors will soon find a cure for what ails the global economies.  It is also hoped there are no more “schemes” lurking in the markets.  What investors need is a miracle cure for economic malaria.