Global Economies React to Deepening Crisis

Posted October 19, 2008

On Friday, October 3, the United States dollar advanced against the euro for one reason. What is now called the U.S. bailout has made global currency traders seek safe haven amid a deepening economic crisis gripping worldwide markets.


The US dollar is liquid and credit is tightening, and these two facts together are driving investors to demand U.S. currency.

The U.S. bailout was intended to provide some stability to the credit markets while slowing the rate at which developed nation economies were sliding into recession.  The problem is no one knows for sure if the bailout will work to prevent a further freeze in USA credit markets.  Even if it works to reverse the downward trend, there is no agreement as to how long it will take for cash to begin flowing once again between financial institutions.

What is interesting to note is that the passage of the U.S.A. bailout legislation did not result in a strong market response.  In fact, by the end of the day the dollar had begun to retreat again after its initial advance.  This can only indicate one of two things.  Either the U.S. dollar value had already anticipated the passage of the bailout bill, or the market does not have faith in the ability of the bailout to prevent recession.

Yet, the demand for the U.S. dollar is driving the value of the dollar upward at its most rapid rate.  On Friday, the dollar recorded the largest advance ever recorded against the euro.  Despite the retreat on Friday from its initial advance, it is predicted the dollar will continue to advance in the coming week because of the credit crunch.  Investors will continue to seek liquid cash in the form of the U.S. dollar.

The numbers read as follows.  The dollar rose 5.5% against the euro from $1.3796 to $1.3819.  The Japanese yen fell against the New Zealand dollar by .8%.  The U.S. dollar fell against the yen by .1%.  The euro fell against the yen by .3%.  Banks in India were closed October 1 through 3 due to the holiday Eid-ul-Fitr.  Normal Rupee currency trading begins again on October 6.

The ever deepening economic crisis is evidence by the nationalization of several European financial institutions.  Fortis in Belgium received financial assistance from the government, as did banks in Germany, the Netherlands, and Great Britain.  The European nations have vowed to prevent further slippage in their economies, though it is difficult for 15 nations to implement a unified bailout plan.  Interestingly, the decline in European bank stability is what resulted in a higher demand for the U.S. dollar leading to the advance of the U.S. dollar against the euro as mentioned earlier.

The Japanese yen was the currency getting much of the attention on Friday.  The Yen gained against the U.S. as mentioned, but also against the euro and Canadian dollar.  On the other hand, the Yen dropped against the New Zealand dollar, the British pound and the Swiss franc. 

All in all, the currency trading over the last 3 days has been wild with the market reacting unpredictably many times.