Pushing On a String

Posted December 23, 2008

The financial markets are quiet right now as the holidays approach. In the meantime the dollar fell against the euro as more US economic data concerning housing is to be reported.


Investors feel like they are pushing on a string when buying and selling in any of the markets right now including currency trading.  That’s because gains are not sustained for longer than about a week at a time.  The equity bear market continues as does the bad economic news, yet the markets remain unpredictable as far as responses.  When you think they should go up…they go down…and visa versa.

In the currency markets, the US dollar is going up and down against the euro and a basket of other currencies.  Pushing on this string means one day you find a strong dollar developing only to have the price start sliding the next.  Overall dollar gains that occurred over the last year are slipping now.  One analyst said investors are no longer acting with panic but they now operate with caution.

The US dollar weakened yesterday against the euro ($1.3948) and other major benchmark currencies primarily because the US was to release new housing numbers today.  Those numbers are out and they are not good, though they are not as bad as the market anticipated.  The November US home sales dropped 2.9% and home prices continue to fall and are now down 13.2% for the year.   All of this data indicates the recession is still deepening which is a story being told around the world.

The US dollar did hold firm against the yen ($.0111) though.  The Bank of Japan cut its interest rates, but only by a measly 27 points.  Investors are concerned about the state of the Japanese economy and are playing a wait-and-see game because up to this point Japan has managed to avoid the worst of the recessionary activity through economic controls.  The announcement that Toyota will be posting a loss is a sign that Japan is now facing a deepening recession despite their efforts.

As of the close of the US market yesterday, 21/December/2008, the NIKKEI had risen by 135.26 points to 8,723.78 whereas the Dow Jones Industrial Average fell by 59.34 points to 8,519.77.  The FTSE showed little movement too losing 37.77 points to end at 4,249.16.  The DJIA small decline even included investor expectations of reports of a US Gross Domestic Product contraction of .5% in the third quarter of 2008. 

Basically the markets are moving into holiday mode with little activity going on.  Investors are not complaining though, because the last 3 months of volatility has been exhausting.  All that string pushing can wear an investor out.

In the UK, investors are currency trading based on speculation the government is going to reduce interest rates again in January.  Cutting interest rates has not proven to be the credit crunch fix expected and this too has held true in the USA.  The pound (£.9469) lost against the euro as representatives from the Bank of England make it clear they need new tactics in order to stop the continued economic decline in the UK.  Sterling ($1.4850) showed little change against the US dollar.

In New Zealand the economy continues to weaken also as did the currency ($.5739) against the US dollar.  The recession that has gripped the globe knows no boundaries.  New Zealand has not seen a recession in 10 years.

The Australian dollar ($.6848) strengthened against the US dollar in response to several factors.  The Aussie advanced in response to stronger commodity prices and a lowering of the Chinese one-year lending rate. 

In Russia, eyes are still on the ruble ($.0352) which has fallen to a 3 year low against the US dollar representing an 18% decline just since August of this year.  Bank Rossii is allowing the decline in the currency in order to combat a drawdown of currency reserves.  The ruble (39.6617) fell against the euro and the basket (33.4917) of currencies.

So it is expected to be quiet in the currency markets between now and the remaining holidays.  Most of the financial activity that will be occurring between today and the last day of the year will be related to propping up balance sheets so companies look solid.  It remains to be seen what plans are in the works and how those plans will impact currency rates. 

So hang on to both ends of that string…..