Poor US Data Shakes Up Currency Markets

Posted September 25, 2009

The US reported economic data indicating the recession is far from over. The dollar rose as nervous investors returned to safer assets. Canada’s dollar declines as oil prices drop. The G-20 is meeting and the role of the US dollar as the world’s reserve currency is being discussed.


Some people are adamant in their belief government stimulus spending is not stimulative to economies.  You have to wonder if recent US housing numbers prove them right.  The US had recently offered an $8,000 tax credit to new home buyers leading to a 7.2 percent spike in July home sales. The consumer response exceeded economist expectations.

The numbers for August are sales after the tax credit program ended and they were disappointing.  Economists had predicted US home sales of 5.35 million units and a 2.1 percent increase.  Instead the sales were at 5.1 million units for August, a drop from July, and month-over-month sales were at 2.7 percent.

The response in the stock market was swift with equities dropping and reversing gains made earlier in the week. As would be expected, the US dollar advanced against many global currencies as investors withdrew from riskier higher yielding asset. Markets are sensitive to negative news and the poor housing data coming out of the US raised worries about the sustainability of the economic recovery. 

The euro fell against the US dollar to $1.4713.  The dollar held against the yen at 91.22 yen.  Sterling fell against the euro to 91 pence. The Canadian dollar fell to C$1.0887 against the dollar. 

Canada’s currency decline was partly due to the continued drop in oil prices.  Crude oil barrel prices for November delivery have fallen to $66.01 a barrel. This is a significant difference compared to the over $71 a barrel reached for October future deliveries at one point.

The G-20 is meeting in Pittsburgh in the US.  Talks will include devising a means for developing a sustainable recovery.  Earlier this week Prime Minister Gordon Brown revealed the UK’s largest bank was within hours of collapsing early in the recession.  The bank was saved by an immediate injection of bailout funds which are different than stimulus funds. The problem now is deciding the best way to withdraw bailout funds.  It had been hoped the process could have started by now, but the banks are still too weak.

Treasury Secretary Timothy Geithner addressed the concerns about the weakening US dollar.  There must be some nervousness among US financial policy makers because Geithner was quite direct in his comments.  He also was a bit defensive as the future role of the US dollar as the world’s reserve currency has come up for discussion repeatedly.

Geithner said at a press conference, “A strong dollar is very important in the United States.”  He reiterated that the US had no intention of standing by and letting the US dollar play a lesser role. As the fallout from the credit collapse continues to shake out, China has emerged as a vocal opponent to business as usual.  China wants less dependence on the US dollar in order to prevent a possibility of a financial collapse as was seen a year ago.

 The Brazil real fell to 1.8030 real against the US dollar.

As would be expected, Mexico’s peso fell after the US reported a decline in August durable goods.  On signs the recession is far from over, the peso weakened to 13.5526 pesos per US dollar.  At one point it hit a 3-week low at 13.5755 pesos per dollar.