Investors Move Into Higher Yielding Currencies

Posted November 16, 2009

The euro continued to strengthen against the US dollar as the global recovery gains speed. The Canadian dollar strengthened significantly as investors seek higher yields. China and the US discussed trade protectionism and skirted serious discussions on the value of the yuan. The UK pound rose also against the US dollar and held steady against the euro


The euro rose over the weekend against the US dollar as economic recovery picks up its pace globally. As the recovery heats up, investors are quickly turning to higher yielding assets.  The euro rose to $1.4948 against the US dollar and to 89.48 yen.

In fact the euro rose against most major global currencies as more and more countries report stronger signs of economic recovery. For example, Japan was happy to report a second quarter 2009 GDP expansion of a healthy 4.8 percent.  As the recovery gains speed, investors are selling off the safe haven assets in order to buy ones bringing more profits.

The Australian dollar rose again against the dollar to 93.27 US cents. It is quite possible Australia will raise its interest rates again in December. The US continues to hold interest rates down in order to drive housing and other prices up.

The U.S. President attended the Asia-Pacific Economic Cooperation group and then went on Shanghai. The US finds itself in a position it is not used to holding – one of dependency on a strong China. The US and Chinese economies are now intricately tied together with China buying almost a trillion dollars of US debt. The US is the largest buyer of Chinese exports.

The Chinese have been criticized in the past for maintaining the value of the yuan at an arbitrarily low level of 6.83 against the US dollar and thus giving China a trade advantage. But President Obama is not able to push too hard on this subject considering the need to maintain good relations for economic purposes. China has denied manipulating its currency in no uncertain terms.

China, on the other hand, has questioned the US commitment to free trade. Recently the US has slapped tariffs on some Chinese imports, such as tires and steel, infuriating China. The issue of trade protectionism is a major topic of discussion between the two countries. President Obama reassured China that the tariffs recently put in place will not be expanded to other products.

Canada’s dollar continued to strengthen also against the US dollar.  This makes the second weekly gain posted as gold and other commodity prices rose. Gold is now at $1,123 an ounce. Canada’s consumer prices rose in October and the September trade deficit narrowed more than economists had projected.  Clearly economic recovery is underway.

The Canadian dollar rose to C$1.0753 against the US dollar. One Canadian dollar is the equivalent of 95.09 US cents. Year to date the loonie has risen approximately 18 percent against the US dollar.

The UK pound strengthened against the US dollar on a weekly basis for the third consecutive week. The pound rose to $1.6689 against the US dollar. The pound remained stable against the euro at 89.38 pence per euro.

The pound rose despite comments made by the Bank of England’s Mervyn King making comments indicating a weaker pound would help economic recovery. The pound has risen by 4.4 percent this year against the US dollar. As the UK economic recovery continues, the pound could very well strengthen further.

The Hungarian forint was the emerging market currency winner last week. The forint rose to 269.32 forints per euro. Hungary’s currency is reacting to signs of economic growth in the Euro-Zone and especially in Germany. Germany is the largest Euro-Zone economy.

Poland’s zloty also strengthened to 4.1133 against the euro for the same reasons.