No End in Sight

Posted February 23, 2009

Investor concerns over Japan's deepening recession have reduced the appeal of the yen as a safe haven asset. The United States and Europe also predict a recession that is going to be longer and deeper than originally thought leading to investors fleeing once again to lower risk investments.


There is no end in sight for the recession as it continues to deepen.  The banking sectors in countries around the world continue to teeter on the brink of collapse and that is not a the-world-is-ending statement.  The seriousness of the problems with the world's financial systems is exemplified by the fact the United States government is considering increasing its stake in Citigroup, Inc.  There is speculation the government's nationalisation of the bank could lead to 40% ownership. 

Though many countries already have nationalised banks, in the US this is a sign of severe financial problems.  Nationalisation of banks is a departure from traditional capitalistic policies, though some people believe the economic crisis is the result of a failure in the capitalistic system.  No matter what view is taken the deepening recession is reaching proportions that are causing investors to once again seek safety in low risk assets. 

Because of the Citigroup, Inc. problem, the US dollar weakened against all major global currencies by the end of last week.  The US dollar fell to $1.2837 per euro and also weakened against the yen to 93.05 yen per dollar.  When paired against the UK pound there was little change at $1.4426.  The US dollar fell against the Swiss franc to 1.1526 francs per dollar. 

The Citigroup, Inc. news also caused the US dollar to weaken against the Australian and New Zealand dollars.  The Australian dollar rose to US 65.01 cents.  The New Zealand dollar rose to US 51.32 cents.  The loonie and kiwi also strengthened against the yen to 60.44 yen per loonie and 47.74 yen per kiwi. 

Speculators are indicating they believe the US dollar will strengthen in the coming weeks.  The Japanese economy is getting worse by the day as the recession deepens.  What was considered the strongest economy in the world just a few weeks ago is succumbing to the global recession.  As a result the yen is being sold in favour of currencies seen as less risky for the moment and with higher yields. 

The recession has impacted every country including those which are the richest by anyone's standards.  This became abundantly clear recently with the news the United Arab Emirates central bank had to purchase half of Dubai's unsecured debt due to Dubai's inability to pay.  Dubai has been severely hurt by the real estate price declines leading to a crisis in the credit markets for the country. 

In another part of the world, the Mexican peso fell against the US dollar to 14.7774 pesos per dollar.  Mexico's central bank lowered its benchmark interest rate to 7.5% which was lower than expected.  Mexico is concerned about inflation due to the falling price of the peso.  The Banco de Mexico is trying to curb the currency volatility the peso has experienced recently. 

In the UK, the economic picture is grim and getting grimmer.  The UK home repossessions are at a 12 year high.  There is real concern the UK may be facing a 10 year downturn if the recession slide is not halted soon.  The UK pound fell slightly against the US dollar as mentioned earlier though the weakening could continue in the coming days due to the financial troubles.  The UK pound also fell against the yen to 134.79 yen per pound and 88.40 pence per euro. 

The Euro-Zone is falling into a deeper recession also.  It had been hoped the stimulus packages which injected billions into markets and financial systems were taking effect, but the bottom is yet to be found.  The Euro-Zone contracted 1.5% in the 4th quarter of 2008.  The purchasing manager's indices indicated a worsening economic future for the 16-country region.  The manufacturing and services composite index fell to 36.2 in February from 38.3 in January. 

Given the gloomy economic reports, it is no wonder that investors have no confidence in the markets yet.