Is It Worth the Risk?

Posted February 19, 2009

The UK pound rose for the first time this week against the US dollar and the yen as investors turned to cheap assets to recover some prior losses. The euro posted gains against the US dollar, yen, pound, and Swiss franc in response to indications the Euro-Zone is strengthening its unity as it deals with the recession.


It all depends on the analyst you choose to follow as to whether you want to believe investors are seeking safe haven or are experiencing a bigger risk appetite.  The Dow Jones Industrial Average hit a 6 year low when it lost 89.68 points to reach 7,465.95.  The FTSE 100, on the other hand, held its position and only gained 11.54 points to reach 4,018.37.

So do you run and hide, or come out charging like a bull?  Should you buy safe haven currencies or should you go ahead and accept a bit of risk again?   It’s difficult to know in such a volatile market.  The currency markets were actually quiet yesterday, 19-February-2008, with most of the market concentrating on absorbing the economic data which continues to show a deepening recession around the world.

The UK pound was a strong currency strengthening against the dollar and the yen.  This indicates a bit of risk taking on the part of investors.  Perhaps with the FTSE 100 holding fairly steady for most of the week, investors decided to venture out into the British currency markets again.  The UK pound rose for the first time this week against the US dollar to $1.4330.  The pound also strengthened against the Japanese yen to 134.81 yen.

The UK pound saw significant losses against the euro in 2008.  With a 23% decline, it is only natural investors would eventually begin to take advantage of this situation by seeking cheap British assets.  The UK Bank of England is also busy, like the US Treasury, trying to find ways to boost the economy.  This has given investors a modicum of interest in seeking riskier assets.

It is generally agreed the euro rate in the near future will be most impacted by the unfolding Eastern European banking crisis taking shape.  Since no one knows yet how this crisis will be handled, there is not much news to report in this area.

The euro rose against the US dollar, yen, pound, and Swiss franc.  The Euro-Zone economic unity has been sorely tested as a result of the recession, but Germany’s commitment to support the Euro-Zone has eased some concerns. The euro rose to US$1.2691; to 119.44 yen per euro; to .5567 pounds per euro; and to 1.4893 Swiss francs per euro. 

The dollar is under pressure as the proposed US mortgage relief and stimulus plans come under fire.  There are deep concerns that both plans will fail to achieve the desired results which means all the government debt will serve little purpose except to create inflationary pressures down the road.  The US dollar weakened to $1.4304 against the UK pound. The US dollar did rise against the Japanese yen though.  The Bank of Japan announced plans to pursue quantitative easing policies and plans on buying $11 billion in corporate bonds in order to relieve the tight credit gripping markets. 

The US dollar also weakened against the Canadian dollar to C$1.2591 or 79.42 US cents.  The increase in the loonie is largely due to increases in oil prices.

There is still so much uncertainty in all the financial markets that it’s still difficult to make projections with any confidence.  The lack of confidence in the global economies and thus the markets is keeping them extremely volatile.