Not Everyone Agrees

Posted March 31, 2009

The US government spoke again about the auto industry and the reaction was swift in the equity markets, but oddly both stocks and greenback value declined. The euro advanced against most major global currencies in a month end surge, while the yen weakened as investors turned to Asian higher yielding assets.


US President Barack Obama plans on telling the G-20 summit which is held on 2-April-2009 that the US will adhere to its policy of quantitative easing which includes investment in failing industries and an expansion of government projects.  Interestingly, in Japan the analysts are questioning the same policies because the country’s infrastructure was virtually rebuilt in the early 2000s during its last severe recession.

In the US, the auto industry is failing and the credit markets are still tight which is leading to a devastating impact on Japanese imports.  Yesterday, President Obama announced he was giving General Motors and Chrysler another 30 to 60 days to resubmit restructuring plans and there would be no additional bailout funding in the meantime.  The uncertainty the announcement created about the future of the US auto industry led to a market weakening.

The DJIA fell by 254.16 points to close at 7,522.02 and so did the US dollar against most major global currencies.  The dollar weakened against the euro ($1.3291) and the UK pound ($1.4182).  The greenback also lost against the New Zealand dollar (56.97 US cents); the Australian dollar (68.97 US cents); and the Swiss franc (SFr1.1405).

In Japan, the yen weakened even more than the US dollar.  It fell to 98.07 yen per US dollar and to 140.30 yen per UK pound which are 1.7% and 1.1% declines respectively.  The yen also weakened against the euro to 129.76 yen per euro.

The yen fell as Asian equity markets increased and investors sought higher-yielding assets.  The NIKKEI 225 rose by 1% yesterday. 

The UK pound weakened against the US dollar for the fourth day as the G-20 summit approaches.  It is clear the UK is suffering the worst recession among the developed economies and there is still no end in sight.  The financial industry is planning more worker cuts and business confidence continues to decline.  The government purchased 2.5 billion pounds of gilts yesterday in an effort to generate economic activity.

The UK pound did strengthen against the euro to 92.68 pence per euro.  But analysts predict further weakening of the UK pound.

It is worth noting that China is still on the move in the financial markets.  As has been mentioned several times, China is proposing establishing a basket world reserve currency.  The government is also busy laying the groundwork for a foreign currency account that does not include the US dollar.

In the most recent news, China came to a 70 billion yuan currency swap agreement with Argentina.    The Central Bank of Argentina manages the peso.  The 3-year agreement between the two countries provides Argentina with the ability to better manage its peso value.  For China, this move expands the country’s campaign to establish currency reserves which contain no greenbacks.  China has expressed concerns over the US debt level and the long term impact debt funding will have on the US dollar. 

As predicted several months ago, there are many global financial changes slowly taking shape.  It is not possible to predict yet how the currency market is reshaping, but that is exactly what is happening.  China is flexing its financial might and emerging markets are joining the effort.  China has swap agreements with South Korea, Malaysia, Belarus, Indonesia and Hong Kong and now Argentina which is the first Latin American nation.

President Obama said he does not believe “there is a need for a global currency”.

Not everyone agrees with him.