My Fair Share of Abuse

Posted January 22, 2009

Central banks are having to intervene in currency markets around the world in order to stabilize rates. The US dollar weakened to a low point against the Japanese yen.


As the Rolling Stones song says, “You can’t always get what you want….but if you try sometimes…you get what you need.”  The markets needed a boost and that is exactly what they got yesterday.  The Dow Jones Industrial Average rose 279.01 points to close at 8,228.10 wiping out most of the triple digit losses from the day before. 

Of course, there is no promise this snap-back will last.  The increase was like taking a deep breath of fresh air before jumping into a pool of crocodiles.  And there are plenty of the snapping ill-tempered beasts just waiting for investors.  For example, the dollar weakened against the yen to a rate it has not seen since 1995.  The US dollar weakened to 87.13 at one point yesterday as investors reacted to the expiration of large options trade contracts.

The yen remains one of the strongest currencies in the market as investors turn to the safety of Japan’s more stable financial markets.  The UK pound fell to a new low against the yen largely due to the fact the UK banking system is obviously still in trouble.  The sterling is being sold off which is disrupting the virtual equilibrium the yen/pound has experienced lately.

Yesterday, the pound weakened to 124.75 pounds per yen.  The pound also weakened against the euro to 93.28 pence per euro and against the US dollar to $1.3948 dollars per pound. 

The other crocodiles in the pond are banking and currency interventionists.  It is clear there is a lot of concern among nations and within markets about currency and financial institution stability.   The Swiss National Bank reported it may have to stop the appreciation of the Swiss franc against the euro and the US dollar.  The Swiss franc rose to 1.4964 franc to euro and to $1.1615 US dollar per franc.

Another intervention affecting currency rates is the Russian government’s planned efforts to stop speculators from taking short positions on the ruble.  The ruble has been devalued so many times recently that investors have started assuming the can expect further such action when the ruble is paired against the dollar/euro currency basket.  The Bank of Rossii is considering abandoning the currency trading band for now in order to prevent further reserve drains.

As has been discussed many times recently, there are a lot of financial market rules and concepts that are just not applicable in the current economic crisis.  The Russian proposal is called a “dirty float” in which the ruble is allowed to act as if it is being priced in a free market but the bank still has the right and power to intervene. 

The ruble strengthened against the dollar yesterday to 32.7299 ruble per US dollar and against the euro to 42.3136 ruble per euro.

While still on the subject of market intervention, some Asian currencies appreciated due to central bank efforts to support prices.  The reduction in export orders in countries like Singapore and South Korea has led to shrinking economies.  The Singapore dollar strengthened to S$1.5043 against the US dollar.  The South Korean won also strengthened to 1,373 won per US dollar. 

The Rolling Stones summed up the feelings of investors when they sang:

And I went down to the demonstration
To get my fair share of abuse
Singin', 'We're gonna vent our frustration
If we don't, we're gonna blow a 50-amp fuse'

Investors are definitely feeling abused and certainly frustrated as currency and equity markets swing up and down from day to day as the bad economic news continues to fill the crocodile pond.