It's the Economy

Posted March 09, 2009

Rising unemployment in the US is leading to investor risk aversion in the US dollar. The euro strengthened against the dollar and yen as the economies in the US and Japan continue to contract.


The news over the last three days which most impacted currency rates was related to the condition of the economies of the United States and Japan.  The US recession is deep and getting deeper with the last reported US unemployment rate reaching a 25 year low.  It now stands at 8.1% and there have been more than 600,000 job losses each of three months in a row.  The total jobs lost in the US which are now attributed to the current recession are 4.4 million. 

Japan is in even worse condition with some analysts claiming Japan is in a depression.  The country had to post its first current-account deficit in over 13 years.  This is primarily the result of the rapid decline in exports by over 46% in 12 months from January 2008 to January 2009.  A 5 trillion yen stimulus package has been approved by the Japanese parliament.

The World Bank announced the global economy is expected to contract for the first time since World War II.  The World Bank did not offer a specific contraction percentage.

The poor economic data in the US and Japan, and the grim prediction for a global economic contraction, led to a weakening of the US dollar.  This was after a week which saw its steady rise as a result of weak equity markets.  The US dollar retreated on Friday to $1.2658 against the euro.  It also weakened against the Japanese yen to 97.65 yen per dollar and the Swiss franc to 1.1533 francs per dollar.

Some analysts believed the dollar rally seen up until Friday was not a valid strengthening and was the result of funding demands on European Banks to cover gaps in dollar funding.  This created an artificial value that does not reflect the true relationship between the US currency price and the economic fundamentals.

The euro saw gains over the weekend when paired with the US dollar and the yen.  The general opinion is that the European Central Bank will not lower interest rates much more and may not go below 1%.  Interest rate reductions around the world have clearly not solved the financial problems.

The euro advanced to $1.2709 yesterday against the US dollar.  It also advanced against the Japanese yen to 124.83 yen per euro. 

The Japanese yen weakened against most major currencies by Sunday evening.  It weakened against the US dollar to 98.22 yen per dollar; weakened against the Australian dollar to 63.25 yen per Aussie; and lost against the New Zealand dollar to 49.66 yen per kiwi.

Hungary has taken action to defend the forint after the decision last week by Economic Union leaders to deny funding assistance to eastern Europe.  Hungary’s forint had reached a new low of 317.22 forints per euro.  The Hungarian Central Bank is planning on converting EU grants on the currency market to protect the forint from further weakness.

Hungary has the ability to borrow 20 billion euros from the International Monetary Fund, the Economic Union, and the World Bank. 

The US stimulus plans are being hotly debated in the US as people not at risk of foreclosure have expressed anger over the government being willing to lower mortgage balances for those who bought houses they could not afford.  Plunging house prices in the US and the UK have led to mortgage balances that are higher than the house value.  The solution to this particular component of the recession has stymied the government agencies seeking to put a stop to the recessionary slide downward. 

There are some hints that credit may be starting to loosen a bit as US retail sales rose in February much to everyone’s surprise.  But small bits of good news are still not helping the recession because the banks are still dealing with toxic assets on the balance sheets.

So it is a new day and a new week, but the same recession.