Same Song…Different Day…More Government Debt

Posted February 26, 2009

The UK pound weakened in response to a UK government plan to stop future credit losses in the banking system as consumers ponder the increasing public debt load. The US dollar strengthened as investors once again invest in safe haven assets.


As the UK government announces a bank bailout plan which could lead to a £1300 billion total injected since the economic crisis began, the pound suffered against the US dollar, yen, and euro.  At the same time, the US dollar rose in response to bad economic news because it is a currency refuge.  The yen remains a safe haven investment also, but to be honest, it has fallen from second place until the deteriorating economy plays out.  Japan is a bit late to the bailout game in that the government resisted capital injections into the financial systems until the Toyota Auto Company made it clear a loss would be posted for the first time in its history for 2008.

The currency rates go up and down in the market, but it is still fear and lack of confidence driving the markets.  In other words, each day right now seems to be “same song…different day”.  Until the US, Euro-Zone, Japan, and the UK manage to find the bottom of the recession, the lack of confidence will continue.

And what about the increasing public debt load?  The unprecedented levels of government spending around the world are sure to have a long term impact on currency rates.  Even now there are negative effects on some currencies with each new announcement of a bailout package.  At the G7 meeting this month, a report indicated the rapid decline in the UK pound “raises questions about the financial stability of the British economy.”

That was definitely not a market inspiring comment.  The pound weakened against the US dollar to $1.4210; to £.8915 against the euro; and it also weakened to 138.31 yen per pound.

The yen is losing its status as a safe haven asset though the government’s ability to confront the crisis keeps the yen safe up to a point.  After all, Japan has already been through a similar economic downturn in the 1990s and learned a lot of lessons they have been trying to share.  For example, policies of quantitative easing should be used sparingly because the rapid increase in money supply can lead to a longer recession.

Japan has been making some noise about weakening the yen to strengthen Japanese exports.  But if they do so, the US auto industry will be hurt further during a time the US government is bailing out the big three US automakers.  The yen fell against the US dollar to 97.78 yen per dollar.  It also weakened against the euro to 124.41 yen per euro. 

The US dollar has been strengthening as investors once again seek safe haven as the US President works his way through one spending announcement after another.  The US budget proposal for next year is expected to be announced today and it will contain a plethora of new spending on things such as health care and energy. 

The US dollar strengthened against the UK pound as mentioned, but it also appreciated against the euro to $1.2738 dollars per euro and the Swedish kronor to 8.9095 kronor per dollar.  The dollar is expected to continue to strengthen against the euro over the near future due to the deepening recession in the Euro-Zone.

So the bottom line is that until there are real signs the US economy is emerging from the recessionary spiral downward, the currency market will remain more volatile than it is during normal economic conditions.  Right now it’s very hard to anticipate markets because of the conditions of the housing and banking industries around the world. 

Same song…different day…more government debt…