Historical Parallels

Posted December 08, 2008

The US dollar strengthened against a varied basket of global currencies. Many investors are yearning for the yen as a safe haven asset.


As the bulls in the financial markets run for the hills, there are two safe havens right now for investors.  One of these is US Treasury securities with their low yields.  The other is the Japanese yen.  The US dollar continued its decline against the yen for what is turning into a long weakening streak.  This week makes the fifth week in a row that the dollar has weakened against the yen ($.0108). 

The yen is considered one of the safest currencies to buy when economic conditions are doing poorly.  The reason is because the Japanese interest rates are so low which makes the yen attractive to borrower's.  The yen has increased by 22% when compared to a number of currencies including the US dollar; the euro ($1.277); the British pound ($1.4714); the Canadian dollar ($.7819); and the New Zealand dollar ($.5308).  In fact, the yen has strengthened against a basket full of currencies around the world. 

The availability of the low Japanese interest rates may be good for borrowers seeking safe haven assets, but the strengthening yen hurts Japan's exports.  That is the same problem facing China. China is trying to keep its yuan renminbi ($.1452).propped up in order to maintain internal economic balance, but exports are declining to the point where manufacturing plants are now being closed.  The trade balance is rapidly shifting as a result of currency rate changes and the global recession.  The yuan posted a drop on 3/December/2008 which is attracting investors. 

Yesterday, 4/December/2008, the US dollar weakened against the euro due primarily to the European Central Bank interest rate cut.  The ECB reduced interest rates by another .75% which means the benchmark rate is now 2.5%  The interest rate reduction made investors feel there is hope the frozen-solid credit markets will begin to thaw so showed some faith in the euro. 

Speaking of credit thaws, there are some early indicators that the US stimulus funds injected into both national and global markets is just beginning to take affect.  There is no reason to get too excited right now about these indicators, because there is such a long way to go.  The thaw has been mostly seen in the US mortgage bond market as a result of Treasury Secretary Paulsen saying he was going to aid the housing market with bailout funds. 

Other currencies are weakening when paired with the US dollar as governments continue to battle deepening recessions.  The Australian dollar weakened to $.6435; Sweden's krona fell to $.1211; the Russian ruble fell to $.0357; the India rupee weakened to $.0199; the Singapore dollar fell to $.6548; and the Thailand Baht weakened to $0.0279. 

The Brazil real ($.3977) weakened also as investors speculated exports will drop significantly in the near future.  Speaking of exports dropping - Canada's dollar is weakening primarily because the country's oil exports have dropped by 70% since July 2008.  The price of a barrel of crude oil is dropping, dropping, dropping with some doomsayers saying it could go as low as $25.  Right now it is at $45 per barrel.   There will be further trade shifting if it continues to go downward. 

The fact that trillions of dollars have been injected into markets, and yet economic data just gets gloomier and gloomier, is an indication there are really no historical parallels for the current financial crisis.  One analyst said the economic problems are one of "market versus state".  The ongoing debate is about how much the state (government) should intervene in the free market.  When do you play "wait and see" and give past efforts a chance to affect the markets?  The daily announcements of further government intervention in financial markets worries investors as reflected in the stubborn refusal to improve their confidence in the markets. A reduction in interest rates and improvements in the assets of bank balance sheets has always stimulated the economy in the past. 

This is a new age and a new time making new history.  At least now we will have an "historical parallel" to use if this kind of economic collapse ever happens again.