Feeling Nervous

Posted March 17, 2009

The US dollar weakened against most major global currencies as investors sought riskier assets. The Australian and New Zealand dollas are rebounding after a month of lows.


The US dollar weakened against most major global currencies as investors sought riskier assets.  It appeared the Dow Jones Industrial Average stock market was going to really for a fifth day in a row which would have probably led to further increases this week.  But at the end of the day the gains were lost and the market broke its 4 day trend closing down.

So why did the US dollar end up weaker?  In the US the looming new financial crisis is the inability of consumers to pay their credit card payments.  Due to increased joblessness, American Express expressed concern over increasing defaults. The market chose the euro, Australian and New Zealand dollars, and the UK pound over the US dollar.

The US Federal Reserve is preparing to meet for 2 days starting Wednesday of this week.  The planned meeting is making investors skittish about the direction the US dollar will take out of fear the Federal Reserve will institute a more aggressive and intervening monetary policy.

The US dollar weakened to $1.3007 against the euro; fell against Australian dollar to 65.78 cents; weakened against the New Zealand dollar to 53.11 cents; fell against a rallying UK pound to $1.41. 

The yen weakened against the UK pound (138.42 yen); US dollar (98.22 yen); the euro (127.87 yen); and the Australian dollar (65.00 yen).  The significant level for the yen at this point is to break 100 yen against the US dollar. 

Australia and New Zealand are seeing appreciating currency values after a month of declines.  The growing optimism in the economies is the increasing commodity prices.  In fact, the loonie and kiwi say a 2-month high against the yen as investors anticipate a lower interest rate cut by the central bank of Australia than originally predicted.  The Australian currency strengthened to 64.90 yen and the New Zealand gained to 52.02 yen.

The euro rose against the US dollar as the European Central Bank indicated there were limitations in the interest rate cuts that could still be implemented.  The G-20 meeting last weekend promised to begin the difficult task of dealing with the problem of dealing with the banking toxic asset values.  This sent a signal to the Euro-Zone and the Asian markets that was seen as positive.   The increase to over $1.30 against the US dollar has not been seen since 10-February.

So we are back to the same question?  Has the financial sector seen bottom?  Is the global financial industry finding some stability?   It does appear the banking conditions are not getting worse, but the G-20 made it clear that until toxic assets are scoured off bank balance sheets there will not be an economic recovery.

The US is in an uproar over the news the global AIG insurance company is paying bonuses to employees though it has taken billions of US dollars to prevent its collapse.  Some of the AIG funds were then sent to overseas banks also raising questions of exactly where the US TARP funds were spent to date.  It is interesting that not even the US government knows.

The G-20 is nervous about the amount of debt the US is taking on.  The nervousness radiates to the Asian countries also which are heavily dependent on exports to the US for economic growth.  The US is expected to face raising over $2 trillion dollars in order to fund the country‚Äôs debt including new programs being introduced by President Obama.

These programs have been proposed, including massive health care reform, despite continued weakening in the US industrial production by 1.4%.  The recession is far from over and investors are keeping this in mind as they enter and exit the currency and equity markets.