Joined At the Hip

Posted November 26, 2008

Currency news will be focusing on Russia rubles soon if analyst predictions are correct. The US fell against the euro for the first time in 4 days.


The financial markets are joined at the hip so to speak.  What happens in one area affects what happens in another.  People flee risky investments such as stocks and seek safe haven in US Treasury bonds.  The Hungary forint weakens as foreign investors pull out of the loan market in that country.  The yen goes up and the US dollar goes down.  The British government announces a new banking crisis and the pound drops.  Equity, Forex and credit markets are all intricately entwined…joined at the hip so to speak.

The latest currency news is focusing on the continuing decline in world currency rates.  The global economic crisis has taken a real toll on currency rates in the developed nation currencies.  For example, British pound currency rates of $1.75 in US dollars are a thing of the past.  But in the emerging economies, the news is more ominous.  The currency market focus has been more on the fact investors have been pulling out of the loan markets out of fear the countries are economically unstable.  Since emerging markets rely on foreign investment for credit markets, this is causing their currencies to tumble.

Credit….stocks…..currencies….all joined at the hip.

The newest sign of currency problems is in Russia and the surrounding countries.  The Russian ruble is falling as investors pull out in order to find safer places to park their money.  Russia has the same problems as other countries.  There has been too much borrowing and when the people backing the credit markets in the country pull out, the result is quickly seen in falling currency rates.  The ruble is going to continue to devalue and analysts are not making predictions as to how much it will fall.

The same is true for other Eastern European countries.  Countries like Lithuania and Bulgaria have not been making headlines, and in the meantime their currency values have been falling.  Liquidity is becoming a serious problem and there are growing concerns there is a new crisis looming because currency pegs are limiting the ability of the governments to lower interest rates to boost currency values. The main reaction to the declining currency values has been to seek more borrowing but through the International Monetary Fund.

You have to wonder at this point how much money it is going to take before the financial markets are considered stable.  Apparently the instability is a bottomless pit.  Remember how we talked about markets being joined at the hip?  As stock market values ebb and flow, so do the currency values.  The result is there are no predictions as to future currency values in even the strong nations such as the US and Great Britain or in the euro.

Speaking of the US dollar….it weakened against the euro again as of the close of Wall Street on 25/November/2008.  The euro stood at $1.3037.  But that was already changing at the writing of this article as investors respond to the news the US economic picture continues to deteriorate.  When investors predicted the euro would continue its rise they were not taking into account the possiblity of continued severe economic declines in global economies.  The US government announced that durable good orders had dropped 6.2% in October which portends a difficult year in 2009.  The US Treasury is printing money like it is going out of style in order to loosen up credit markets and prevent deflation.  Investors turn to Treasury backed securities when they get scared.

One analyst said: Inflation causes a recession while deflation causes a depression.  Investors are trying to guess how deep the recession will go in various countries in order to determine where their money will be the safest.  The Japanese yen rose against the euro as investors seek safe haven once again.  The low interest rates in Japan have provided the starting point for measuring currency risks as investors move about in carry trades.  The Japanese yen is the currency used to measure risk.

With all the financial markets joined at the hips, investors are responding almost too rapidly to economic news on a day to day basis.  They are being encouraged to not over-react which is the stance Japanese investors have taken.  Japanese investors are not expected to convert their funds into higher yielding assets overseas in order to keep the yen propped up.

Japan has certainly been an economic leader through this global crisis.  When the dust settles and there is time to study the impact on the hip-joined markets, it will be interesting to see what the final opinion is on how Japan handled the crisis.  It appears everyone will be learning a lot from this country.