Is The Honeymoon Over?

Posted February 02, 2009

The US economic stimulus plan the world is waiting for Congress to pass will not become law unless there are major changes made to many of the included provisions. Risk aversion has returned to the currency markets leading to a strengthening of the yen and US dollar against major global currencies.


The US economic stimulus plan proposed recently by newly elected President Barack Obama led to a triple digit increase in the stock market last week.  This week the same proposal is causing stock markets to decline as investors listen to proposals for more government restrictions on use of the funds by banks.  The US Senate is controlled by the Republican Party which opposes the current stimulus bill passed by the House of Representatives. 

It would seem that a mere two weeks into the new presidency, the honeymoon is already over.  Investors are concerned about the limitations on stimulus spending and the continued uncertainty as to whether more US government spending will even help slow down the recession.  There is also rapidly increasing worries over the amount of debt the US is incurring and how it will be sustained over the next years.  Until the US begins economic recovery there is not much hope for other countries to expect the same because of import/export dependence. 

The recession continues to get worse which is leading markets back into their volatile state.  As a result, there has been a return to safe haven investing practices which means the US dollar and yen will strengthen against other global currencies. 

The US dollar strengthened to $1.2775 against the euro and against the UK pound to $1.4052.  The yen strengthened against the euro to 114.18 yen per euro and to 89.39 yen per US dollar.  It also strengthened against the pound to 126.18 yen per pound.  The Japanese yen is certainly the strongest currency in the market right now. 

The UK pound is weakening right now as the country continues to struggle with determining what government actions will slow down the recession.  The Bank of England is expected to reduce its benchmark interest rates again this week to 1%.  The European Central Bank is predicted to keep rates at 2%. 

Russia's ruble is under attack and it appears the government will not be able to continue its defence.  The government widened its currency trading band against the US dollar/euro which equates to 36 rubles per dollar.  The Bank of Rossii has announced intentions to keep the ruble at 41 rubles against the basket (36.45 rubles per US dollar), but ruble weakening is making this intention look somewhat futile.

Canada's loonie has begun weakening again against the US dollar as crude oil prices declined again.  The March delivery rate for oil is $40.01.  The Canadian dollar fell to C$1.2411 per US dollar on concerns Canadian oil exports will drop. As discussed earlier, these actions in the currency markets are a result of investors moving money into the safe haven currencies which are the US dollar and the yen. 

Also weakening steadily is the Brazil real as export orders fall.  The Brazil real weakened to 2.3616 reals per US dollar and this is the 6th straight month the real has posted a decline.  Economic growth in Brazil is predicted to continue to decline at an accelerated rate. 

Unfortunately, there is really not any good news to report.  Consumer spending in January in the US fell a full 1% and as Congress goes to battle over what kind of stimulus package will promote economic recovery, housing prices are still falling.  As long as housing prices are declining, there simply will not be a recovery in sight. 

President Obama took office promising the old partisan politics are over.  Yet it seems to be business as usual right now as Congress splits along party lines in support of the stimulus plan.  The package as amended right now equates to another $900 billion in government spending.  Hmmm….wonder if China would like to own more US government debt before year end?

Yes…the honeymoon is over it seems.  It was nice while it lasted.