Euro Heats Up as Recovery Accelerates

Posted September 16, 2009

The euro showed strength as the global economic recovery heats up. The Canadian dollar rose against the US dollar as commodity and oil prices climb. The Brazil real and South African rand reached yearly highs against the US dollar.


The UK pound weakened against the euro as the Bank of England Governor indicated that the deposit rate at the central bank may be lowered to keep reserves intact.  The currency fell to a 4 week low at one point to 88.95 pence per euro.  UK housing prices seem to be stabilizing which is also contributing to a stronger sterling.  By the end of business yesterday New York time the pound was at 88.90 pence per euro.

If the rate is dropped it will be probably be at the October central bank meeting.  The yield on 2-year gilts fell to a 15 year low at .75 percent.  The current deposit rate is at .5 percent.  The central bank is still managing a quantitative easing program and is looking for a way to slow the rate of asset purchase.  Maintaining a higher level of reserves at the bank is one strategy.

The UK GDP is expected to resume growth in the 3rd quarter this year.  But it will take 2 years to reach the same level of expansion that existed at the time of the financial market collapse.

The US Federal Chairman Ben Bernanke publicly stated he believes the recession is over.  This will drive investors to higher yielding assets like the equity markets and assets in countries with higher interest rates like Australia (3 %) and New Zealand (2.5 %).  It is expected that the US dollar and yen will weaken.

The Australian dollar rose to 86.51 US cents.  The New Zealand dollar also rose to 70.63 US cents. Both will probably continue to strengthen as the recovery heats up.
Proof in fact occurred yesterday.  After Bernanke’s statements, the US dollar fell against the euro to $1.4679.  The Japanese yen also fell to 133.35 yen per euro.

Mexico’s peso strengthened against the US dollar in response to a 2.7 percent increase in August US retail sales.  The peso rose to 13.2896 pesos per US dollar.  Up to 80 percent of Mexico’s exports reach the US which means the 2 economies are closely tied.

The Canadian dollar rose against the US dollar also on the news US retail sales increased more than predicted in August. The loonie strengthened to C$1.0724 against the US dollar. One Canadian dollar purchased 93.25 US cents late yesterday. 

Canada’s economy is poised to grow as oil and commodity prices begin to rise.  The problem Canada faces is preventing excessive currency strengthening that could jeopardize the pace of recovery.  The price of a barrel of crude oil for October delivery rose to $70.31 a barrel.

The Brazil real is in the currency news again as it strengthened to a yearly high against the US dollar.  The real was at 1.8025 real per US dollar.  Year to date the Brazil real has grown by 28 percent against the US dollar.  Brazil’s economy is clearly in recovery with retail sales rising by 5.9 percent in July.  The real is predicted to continue strengthening as the recovery accelerates.

The South African rand also rose to a yearly high when it reached 7.3761 rand per dollar. The rand has strengthened by 27 percent against the US dollar this year.  It has also risen against the euro to 10.7891 rand per euro.  The South African interest rate is at 7 percent which is extremely attractive to investors looking at zero to .25 percent in the US.