Euro Changes Course

Posted December 18, 2009

The euro strengthened against most major global currencies as economic recovery continues. The Japanese held the benchmark interest rate at its historic low. The Swiss are ending their policy of currency market intervention. The South African rand strengthened against the yen. Austria was forced to nationalize a major bank. The Brazil real weakened against the US dollar.


The euro reversed course and strengthened yesterday against the US dollar and most other global currencies. One of the primary reasons for the change was a positive report coming from Germany showing improving business confidence. 

Exports, especially of autos, are fueling the German recovery at this point. Unlike many countries, Germany is already exiting stimulus programs which may slow recovery but will help the country manage its budget.  The government has reported it expects a 1.6 percent GDP expansion in 2010.

Also impacting global markets is a situation in Pakistan where there had been rumours of a coup. Though a coup did not take place, there are signs the current government is weakening creating a potentially unstable condition. Some of the euro’s rebound was due to the news the rumours were incorrect. The coup rumour drove investors to safe haven assets.

The euro strengthened to $1.4396 against the US dollar. It also rose against the Japanese yen to 128.64 yen. The euro was at 1.4966 Swiss francs per euro.

The Japanese central bank voted to keep the benchmark interest rate at .1 percent. Japan is concerned about the possibility of a double dip recession.  The country is experiencing deflation and debt is at a staggering 200 percent of its GDP. Japanese policymakers are discussing whether there should be an easing of monetary policy in the near term. If it chooses a looser monetary policy it will be one of the first developed nations to do so.

As has been discussed, the currency markets currently respond to major global events, rumours, and news reports. There is much volatility in the markets with some analysts wondering what the next major announcement will be. Last week saw Greece and Spain credit rating downgrades and a couple of weeks earlier it was the possible Dubai loan default.

Earlier this week Austria announced it must nationalize the Hypo Alpe-Adria Bank which will require 450 million euros.

This type of news makes it clear why the central banks around the world continue to say the recovery is tenuous. Without continued bailouts the financial markets would easily fall back into crisis. For this reason there has been no push by the European Union or the US Federal Reserve to end economic programs intended to support the banking and lending industries.

Switzerland has been intervening in the currency markets since March of this year. Though the Swiss are ending the currency program they have made it clear it would be restarted at signs of excessive franc appreciation against the euro.

The South African rand has been appreciating against the yen and is now at 11.9308 yen per rand. This is a 25 percent increase for calendar year 2009 against the yen.

The Brazil real fell against the US dollar to 1.7991 reais per dollar. The real has appreciated by 29 percent this year. Brazil is expected to grow by 5 percent in 2010. Brazil along with Columbia and Chile are will be the regional economic leaders in the post-recession world.

With the year end approaching investors are more anti-risk prone and less likely to venture into unknown or uncertain territories.