Settling Down?

Posted January 12, 2009

The euro is meeting predictions and falling against the US dollar. The equity markets once again seem to be looking for the bear which is leading to investors seeking safe haven currencies such as the US dollar and yen.


What a mess!  That doesn’t sound to professional, but it is exactly what a lot of global investors are secretly thinking right now as interest rates go lower, lower and even lower while stock markets threaten to enter another weekly downswing.  On 12/January/2009 the Dow Jones Industrial Average lost 5.24% and the NEKKEI lost 4.3%. 

Unfortunately there is really not much good news on the horizon either.  The European Central Bank plans to cut the benchmark interest rate in response to the deepening recession.  The US commerce Department December retail figures are coming out this week and are expected to be grim, because retailers have already indicated revenues and profits continue to fall.  Bankruptcies and insolvencies are increasing. 

Continuing the recession saga….. 

Last week the euro zone inflation rate fell below 2% which is leading to concerns of the impact of deflationary pressures.  German exports have fallen significantly and France’s industrial production is rapidly declining.  Crude oil prices continue to fall also and reached a low of $37.48 per barrel.   The UK has reported it expects another 15,000 jobs to be lost in the 1st quarter of 2009.

The result of all these factors is a weakening of the euro against the dollar as yields fall on euro based assets.  The euro fell from $1.3432 on 9/January/2008 to $1.3383 late on 12/January/2009.  Investors are once again on the prowl for safe haven and higher yielding assets which leads to assets backed by the US dollar or the yen.

Some people feel the European Central Bank is acting too slowly when it comes to adjusting interest rates.  This is putting pressure on the euro which is contributing to its weakening.  The euro reached a one month low against the US dollar yesterday and there is continuing downward price pressure.  Analysts are generally predicting the euro could fall as low as $1.32 against the US dollar and will not go over $1.36 if it strengthens during the week.

With oil and other commodity prices falling many countries are experiencing currency declines against the US dollar and the yen.  They include Canada, Australia, Russia and New Zealand.

Canada’s dollar fell to $.8204 against the dollar while the Australian dollar fell to $.6744.  The New Zealand dollar weakened against the US dollar to $.5627.  Against the yen, Canada’s loonie fell to 60.49 yen per Canadian dollar.  The New Zealand dollar fell to 50.49 yen. 

In fact, the UK pound also fell against the US dollar and yen due to a deepening recession.  The UK pound weakened to $1.4843 per US dollar; to 90.01 pence per euro; and to 132.20 yen. 

Clearly the US dollar and the yen are the strongest currencies in the world.  Countries like Russia are devaluing currencies in order to slow the drain on the country’s currency reserves account while also propping up the economy.  Officially, Russia is not in a recession but one is looming as exports drop and the demand for oil continues to decline.

One of the problems investors are facing is the fact there is no clear sign yet as to what normal will be once things begin to settle down.  Of course, “settling down” is not a term being used right now as all the markets continue to be extremely volatile.  What the triple digit declines in the stock markets indicate is a return to a lack of investor confidence in the markets.  That is not good for anyone.

A lot of articles are being written right now which are trying to be more optimistic and hopeful about a turnaround of the recession.  But it’s hard to think about optimism when you are losing money or racing from one market to another trying to minimize losses.

If you want to play it safe right now….go for the US dollar or the yen.