Recession Refuses to Let Go and Global Currencies React

Posted August 05, 2009

US economic data shows the recession is still deepening with unemployment claims continuing to rise. The Japanese yen strengthened against the greenback in response to the numbers. The UK pound continues to strengthen against the US dollar also.


The US issued economic reports today that proved the recession is still not bottoming despite rising equity markets.  The ADP Employer Services reported that unemployment rose by 371,000 claims in June and the number had been expected to be 350,000.  The news could get worse when last week’s joblessness claims are reported.

This is clearly a sign the recession is still getting deeper and US unemployment numbers are expected to show that the nation’s unemployment is now at 9.7 percent.  US service industries contracted by more than was predicted which was not good news either.  It was only last week that communications giant Verizon announced 8,000 people would be laid off in an effort to reduce costs.

It is expected investors will return to using risk aversion strategies as they digest this discouraging economic news.  The new economic numbers only prove that Federal Reserve Chairman Bernanke was correct when he said that signs of possible recovery were fragile.  It appears there is not a sustainable recovery in the making yet and the “green shoots” could quickly disappear.

The Japanese yen strengthened to 94.88 against the US dollar.   The yen also strengthened against the euro to 136.69 yen.

The US dollar remained virtually unchanged against the euro whereas it strengthened against both the Australian dollar (84.10 US cents) and the New Zealand dollar (67.16 US cents).

The UK pound strengthened again against the US dollar to a 9-month high.  Economic reports in the UK reflected improving data in services, manufacturing and home prices.  The pound rose to $1.7008 when paired with the US dollar.  Sterling also rose against the euro to 84.75 pence.

The Bank of England is getting ready to meet again and the benchmark interest rate is expected to be left unchanged.  The rate is currently at .5 percent.  It will probably be unnecessary for the government to expand its stimulus spending program if the recovery continues to expand.

In another part of the world, the Bank of Israel increased its purchase of US dollars leading to a weakening of the shekel against the US dollar.  The shekel fell by .9 percent to reach 3.9112 shekel per dollar. This was the third straight day the shekel has fallen.  The interest rate was left unchanged by the bank.

Mexico received good news when Moody’s Investors Service kept the foreign debt rating at Baa1.  This was in recognition of Mexico’s efforts to maintain fiscal discipline despite difficulties balancing the country’s budget.  The peso rose to 13.0400 pesos per US dollar.

The Columbia peso strengthened to 1,989.34 pesos per US dollar.   Tax payments are due next week so US dollars are being sold in the Forex market by companies needing tax funds. 

The Chile peso weakened against the US dollar to 540.07 pesos per US dollar.  The Central Bank of Chile reported that the economy contracted in June by 4 percent in comparison to June of last year. 

The Canadian dollar rose to C$1.0697 or 93.48 US cents.  The Canadian benchmark interest rate is currently at .25 percent.  There had been speculation the central bank would raise the rate but it is now expected to remain unchanged through the second quarter of 2010. 

The rapid Canadian dollar appreciation has threatened economic recovery.

The Brazil real has increased by 28 percent against the US dollar this year.  It has been one of the best currency performers this year.  Yesterday it rose yet another .2 percent and reached 1.8136 real per dollar.  The Brazilian economy is showing signs that economic recovery may be faster than that experienced in other countries.  This is attracting investors with a risk appetite looking for higher yielding assets.