For Better or For Worse

Posted January 30, 2009

The dollar and yen strengthened against most global currencies as the economic numbers around the world get worse and worse. If the new US stimulus bill proposed by President Obama passes with the "American Only" clause there will be possible serious consequences in terms of trade, because it is seen as a sign of a growing trend toward protectionism.


When the US 4th quarter 2008 Gross Domestic Product numbers were released, it was only proof you have to be careful about interpreting numbers.  The official number shows a -3.8% decline.  This is better than the -5.0% predicted. 

But there's a catch.  If you take out government spending and inventories, the GDP number would have been -5.50% which is worse than expected.  It reminds you of the half-full or half-empty saying.  Investor optimists are concentrating on the better numbers and investor pessimists are pointing out the economy is still in serious trouble and getting worse. 

The US government is not the only one reporting "better or worse" figures either.  The Euro-Zone is reporting a 2-year high unemployment rate.  Japan is entering a deeper recession as industrial production drops.  New Zealand and Australia home sales continue to decline along with exports.  The optimists like to point out there are tiny indications that things could get better by the end of the year.  They point to small cap increases in the equity markets and signs some global financial companies are getting back on sound footing.  

Because of the continuing poor economic news, the US dollar and yen are strengthening against most major global currencies.  The dollar and yen are the safe haven currencies and the ones investors turn to when they get nervous.  It's all about avoiding risk in a risky market right now. 

The US dollar strengthened to $1.2914 against the euro.  It also gained against the Australian (US$.6461) and New Zealand ($US.5129) dollars. 

The yen strengthened also when paired against any one of these currencies.  The yen strengthened to 115.41 against the euro.  The yen strengthened to 57.72 yen per Aussie dollar. The US dollar, on the other hand, has weakened against the yen falling to 89.4 yen per dollar.  But the US dollar did strengthen against the UK pound to $1.4246 dollars per pound. 

So what does all of this mean?  It means financial markets remain extremely volatile and investors are poised to rush to safe haven currencies at signs of increasing risk.   The changes in currency rates in terms of percentages over the last year and month reveal the volatility.  For example, the US dollar strengthened 8.2% against the euro just this month.  The yen strengthened by 29% against the euro last year.

The new stimulus plan proposed by President Obama and passed by the House of Representatives has some clauses that are causing US trading partners great unhappiness.  There is a "Buy American" clause which prohibits US companies from purchasing foreign steel or iron for any infrastructure project funded with stimulus package money. 

The bill will most likely be amended before passed, but countries like Canada have a right to worry about the shift in attitude.  Canada sells 40% of its steel in the US.  Even if the clause is removed, the fact it was even added at all during the bill writing process indicates a shifting trade policy by the new administration.  The discussion of trade protectionism, which has serious implications for currency rates most affected by export levels, is just now heating up. 

So in the final analysis, you want to be careful when you hear the numbers.  The recession is still worsening but government analysts are trying to soften the blow at times by not reporting the whole story.  The numbers may be better or worse depending on how you want to evaluate the condition of the economy.