Seesawing Currency Markets Reflect Seesawing Recovery

Posted September 08, 2009

The Japanese yen rose against most major global currencies as signs of economic recovery advance and retreat. Industrial production in the UK is wavering leading to a weaker pound. The United Nations is now calling for less reliance on the US dollar as the international trade currency.


Like a child’s seesaw apparatus, the safe haven currencies have been strengthening and weakening from day to day without predictability.  That is because they are responding to economic announcements such as small changes in the price of oil or joblessness numbers at a pace not really reflective of the news itself.  Called knee-jerk reactions, the markets are very antsy or volatile right now.

Yesterday, the yen rose against most of the major global currencies as investors took a breather.  The indications of economic recovery are encouraging and growing stronger all the time (think of Germany’s five month industrial output growth) which means investors are pulled towards riskier assets giving higher yields.  Yet the economic trauma of the last 12 to 18 months has also created a nervous market ready to pull in its claws at any time.

For example, the currencies like the Australian dollar are linked to economic growth yet investors chose to take a rest yesterday.  Both the Aussie and New Zealand dollar are near one-year highs against the greenback as commodity prices increase.

The yen rose against the US dollar to 92.94 yen. The yen also strengthened against the euro to 133.13 euros per yen.  The Aussie held at 85.57 US cents after hitting a one year high of 85.78 US cents on intraday trading.

Can higher Australian interest rates be far behind?  There is a good chance the Aussie benchmark interest rates will increase at the next meeting of the Reserve Bank of Australia.

Typically the global economic news is mixed.  One of the reasons investors returned to the safe Japanese yen is that it appears the UK industrial production rate slowed in July (.2 percent) compared to June (.5 percent).  It should be noted that some analysts simply don’t believe the recession is ending yet despite some glimmers of hope in certain economic areas.  Deciding who is right is impossible right now and only continued signs of economic growth will prove who is right or wrong.

One thing is certain though:  the claims that the recession is over being made by US President Barack Obama seem to be premature.  Just ask the UK which intends on expanding its quantitative easing program in an effort to force recovery.  The pound fell against the yen as investors digest the continued signs of economic weakness. 

The yen rose against the UK pound to 151.51 yen.  Despite the stronger yen, the fact is that Japan is dealing with slowing exports that will delay sustained recovery.

In another part of the world, the Argentina peso fell against the US dollar to 3.8506 pesos per dollar.  The fall is due to numbers showing export dollar inflows have weakened.

The Chile peso also fell against the US dollar to 553.2 pesos per dollar as the Chilean economy continues to contract.  The Venezuela bolivar rose to 6.48 bolivars per dollar.

The South African rand rose again to 7.5860 rand per dollar making it the second best performing global currency among major currencies for 2009.

There are increasing calls around the world by economic policy makers to develop an international trade account that is less reliant on the value of the US dollar.  As economic recovery looms on the horizon, the global countries are now turning their attention towards preventing a financial collapse of this magnitude in the future.

All roads lead to the US dollar. The United Nations is the most recent organisation to call for a reduced dependency on the US dollar as the trade reserve currency.  If you recall, the group now called BRIC (Brazil, Russia, India, China) has called for the replacement of the US dollar as the primary currency used in international trade account settlements.  This is unlikely to happen but there will probably be increasingly less reliance on the greenback over the next 10 years.