Resting in the Corner of the Ring

Posted December 18, 2008

Financial markets seem to be in a “wait and see” mode as the US dollar weakens against all major global currencies after Fed rate cut announcement. The sterling fell to a record low against the euro.


It’s not too hard to imagine a battle weary fighter in the corner of the ring trying to get his breath while bleeding from several cuts.  That is the picture you get when looking at the global financial markets.  The markets seem to be “resting” right now as investors take a wait-and-see approach after the US Federal Reserve cut the benchmark interest rate to between 0% and .25%.  

Of course, banks were already in effect lending at zero percent interest rates so this move by the Feds may or may not have an effect on the economy.

But this Fed action shifted currency power to the euro and as a result the US dollar fell against the major global currencies.  At the end of the day on 17/December/2008, the numbers read like this in US dollars: euro ($1.4347); British pound ($1.5473); Canadian dollar ($.83314); Australian dollar ($.7006); Japanese yen ($.0113); New Zealand dollar ($.5910); Swiss franc ($.9270).   The US dollar has now recorded a year-to-date advance of only 2.9%.

The change in the US dollar against some of these benchmark rates was significant too.  For example, the euro went from $1.3958 to the $1.4347.  This has led to increasing parity between the euro and the British pound (£0.9325).   Sterling is weakening against the euro, the US dollar and the yen as a matter of fact.  The Bank of England is considering cutting interest rates in January and is being pressured to follow the aggressive tactics taken by the US Federal Reserve.

The UK economy continues to sag as economic numbers indicate and this is weighing down the British pound.  Jobless rates in the UK have reached levels not seen since 1991.  Of course, the US is in the same condition plant closures announced every day, housing foreclosures increasing, and a giant automotive industry in deep trouble.

Despite the weakening dollar, oil prices have surprised investors by continuing to decline.  The price of a barrel of crude oil fell to $40.23 yesterday and actually hit below $40 during the day.  The dropping prices are a reflection of continued anticipation of lower global demand due to joblessness and a significant reduction in auto sales.

The wait-and-see attitude of investors led to little movement in the equity markets.  The DJIA lost 99.80 points to close at 8,824.34.  The FTSE gained 15.11 to reach 4,324.19 while the NIKKEI lost 12.42 points and reported at 8,600.10. 

The new term that is being used more and more frequently is “quantitative easing”.  The US dollar is weakening partly because the US Federal Reserve has said it will print all the greenbacks needed to unfreeze credit markets.  This means the Federal Reserve is virtually becoming a bank temporarily by purchasing mortgage related bonds, consumer loans and corporate debt.  The quick fall of the US dollar is directly tied to the policy of quantitative easing, because investors see it as creating an uncertain future.

The Japanese yen (126.60) declined against the euro after the Japanese Finance Minister announced the government might have to intervene in the foreign exchange markets to halt the rapid yen gains.  The yen (61.79) also fell against the Australian dollar. 

The financial expert predictions for 2009 are beginning to come in and they anticipate a tough fight for the US dollar.  Between budget deficits, zero interest rates, and money printing in addition to stubbornly frozen credit markets, the dollar will be struggling to maintain its value against global currencies.  On the other hand, if the policy of quantitative easing works to get credit moving again, the dollar could strengthen early next year. 

So the weary investors rest in the corner of the financial rings and wait to see how strong the other boxers are before making another move.