Putting Out the Fire with Flame

Posted April 06, 2009

The Japanese yen and US dollar weakened against most major global currencies as signs emerge the economies of the two economic powers are hitting the bottom of the recession. There are many Asian region reports to be issued this week which will give a clearer indication of the status of the emerging markets.


There is an old expression that says you cannot put out a fire with a flame.  But that sounds like what has had to be done to stop the sliding economies from sinking lower.  The stimulus packages, bailout funds, zero interest rates, and increase in financial power of the International Monetary Fund are creating a new global financial environment that no one really understands yet. 

But the good news is the recession really does seem to be hitting its low point which means the long uphill battle to restore economic stability begins.  But because of the flames used to put out the recession fire, there are plenty of smouldering hotspots ready to flare up over the next five to ten years.  The word “flames” is another word for “debt”.  

As the recession seeks bottom, investors are chomping at the bit to invest in higher yielding assets.  The recession played havoc, of course, with portfolio values and balance sheets, and investors and financial institutions are ready to begin recovering some losses.  As a result the US dollar weakened against major global currencies and the yen weakened against the dollar. 

The yen fell against the euro (136.22 yen to euro) and against the US dollar to 100.74 yen when paired with the greenback.  It also fell against the Australian dollar (72.74 yen) and against the New Zealand dollar (59.74 yen).  

The yen began to weaken after US Federal Reserve Chairman Ben Bernanke indicated the US stimulus programs are beginning to take hold and the credit freeze is starting to show signs of thawing.  In addition, the Bank of Japan is not expected to raise its benchmark interest rate which is currently near zero.

The US dollar also weakened against major currencies other than the yen.  The indications the US recession is finding bottom is creating investor optimism in the markets.  The US dollar weakened to $1.3575 US dollar per euro.  It also weakened against the Australian (71.67 US cents) and New Zealand dollars (59.30 US cents).  

The higher interest rates in Australia (3.25%) and New Zealand (3%) are attractive to investors finding near zero rates in the US and Japan.

The UK pound strengthened against the euro to 90.69 pence per euro.  The UK economy is also sending signals the recession is easing.  You will notice the word “easing” is used, because the UK is not on the road to recovery.  The numbers are simply showing the economic downturn is slowing its pace.

The UK pound also strengthened against the US dollar to $1.4826 US dollars per pound. 

There is a lot of economic news coming from the Asian markets this week which will give a better picture of the region’s financial condition.  For example, the Taiwan and Indonesia wholesale price reports will be issued.  China, pushing for a non-dollar based global reserve account, is releasing a report on its March foreign exchange reserves.  Asian equity markets and currencies have been strengthening in response to indications the US and Japanese recessions may be finding their low points. 

The Taiwan dollar is at NT$33.38 against the US dollar.  The Chinese yuan is at 6.8348; the Indonesian rupiah is at 11,465; and the Malaysian ringgit is at 3.5803.  

With the signs the recession may be responding to global stimulus funding, what is the next step?  US President Barack Obama failed in his attempt to get the G-20 to agree on a global coordinated financial stimulus plan.  It is clear the US has retained its currency as the base global currency despite China’s efforts to change that fact, but the massive US debt is a looming problem yet to be faced.  The US Congress is about to pass a $3.6 trillion dollar budget. 

It’s going to take a big flame to put out the debt fire in the coming years.