Posted June 28, 2009
Japan's industrial production rose for the third month in a row. The US dollar weakened against the yen. The euro is poised to strengthen this week against the US dollar as consumer confidence rises.
The expectation is that the Euro-Zone will not see an increase in interest rates anytime soon because it is expected the numbers to be issued this week will show consumer confidence is improving. This has led to a strengthening in the euro against the yen to 133.76 as of early morning Tokyo time on 29-June-2009. This is encouraging news in a region dealing with the uncertain signs of a recession trying to find bottom.
The euro also strengthened against the US dollar to $1.4044. Some analysts expect the euro to continue to rise this week if the actual numbers support the expectation of a rise in consumer confidence in the euro. Early reports show an increase in the index to minus 30 for June in comparison to minus 31 for May 2009.
The US dollar weakened against the yen to 95.35 yen per dollar early Monday morning. The economic data in Japan indicates an increase in industrial output for May which means production has risen for a straight 3 months. Output increased to 5.9 percent which is interpreted to mean the country is beginning to recover from the recession.
But in continuing mixed signals in Japan, there was also economic data indicating a fall in retail sales by 2.8 percent in May 2009 as compared to May 2010.
China is calling for a new structure for the world reserve currency which is “delinked from sovereign nations.” The impact of this statement on the US dollar is due to the fact that China is the largest holder of US Treasury securities sold to fund the US debt. In a market ready to sell the dollar for higher yielding investments, this statement had a negative impact on the US greenback.
China is recommending the International Monetary Fund expand its use of Special Drawing Rights which represent a basket of currencies rather than a single currency.
China has already established currency swap agreements with several countries including Hong Kong, Argentina, and Malaysia. It is working on a similar arrangement in Brazil where both the exporters and importers can complete transactions in their local currencies. The China-Brazil agreement is not completed yet and would not be a strict currency swap arrangement like the agreements already in place. But what would be the same is the fact that the transactions between China and all the countries where agreements are set up will include bypassing the US dollar.
The newest banking crisis to make the news is found in Spain. Spanish banks have not been propped up by government funds yet unlike other countries around the world. But Spain’s economic outlook is grim with predictions of 20 percent unemployment being accepted as reasonable for 2010. The GDP is expected to contract by 4.2 percent in 2009. The government has been working on developing a bailout plan since March and current plans include the Spanish government gaining a say as to whether banks accepting funds will have to merge or restructure.
Venezuela is considering the possible need to devalue its currency despite the fact such a move might fuel further inflation. The current fixed exchange rate is 2.15 bolivares per US dollar and the devaluation might be needed to offset declining revenues. The established fixed exchange rate is considered to be unsustainable over the long term.