Silence is Golden

Posted February 25, 2009

The yen comes under continued pressure as the Japanese economy deteriorates and investors accept some investment risk in other currencies. US President Obama offered hope of recovery to nation and the world in address to full Congress.


The pessimism that has gripped the financial markets has certainly been justified, but it is also self-defeating.  The longer people lack confidence in the banking and financial institutions, the longer the recession will last.  Global leaders, including US President Barack Obama, are being encouraged to change the rhetoric from one of doom-and-gloom to one of hope. 

Last night President Obama gave his first speech in front of both the Senate and the House of Representatives.  He spoke much more cheerfully indicating his belief the US will emerge from this crisis stronger than ever.  And what did investors think of his speech?  The DJIA is down again today!  Wasn't it just pointed out that when the politicians speak right now…the markets drop?  What happened to the saying which claims silence is golden? 

But it was not the cheerful rhetoric in the Obama speech causing the problem; it was the talk about increasing taxes on businesses and the wealthy, indications there would be trillions more needed for new social programs, and the message that businesses would have to endure more government intervention. 

One thing needs to be made perfectly clear though.  It is believed the US dollar will remain the strongest global currency in the months and years ahead.  It is the US dollar and the yen which are still the safest currencies to invest in even though Japan, like the US, is battling an economy that wants to slide lower and lower. 

The yen has come under pressure as a result of Japan's economic woes.  The US dollar strengthened against the yen yesterday as the stock market rose while Federal Reserve Chairman Ben Bernanke indicated the US was not interested in nationalizing banks.  Investors were willing to sell their safe haven assets and move into riskier assets so were dumping the yen.  The US dollar reached 96.81 yen at one point.  Of course, that may change today as the stock market appears to be on its way down again. 

The euro also increased against the yen with the euro considered a higher risk asset.  The concerns over the ability of Eastern Europe to repay foreign debt have subsided (for now) and the Euro-Zone is seen as being a little more economically stable as a result.  The euro rose as high as 124.63 yen and even reached a six week intraday high of 124.75 yen per euro. 

The euro also rose against the US dollar as the stock market rose.  The euro strengthened to US $1.2846.  The pound strengthened to $1.4488 US dollars and the Swiss franc weakened to 1.1606 francs per US dollar. 

In the UK there are indications coming from the Bank of England that a policy of quantitative easing may be instituted.  Since the currency markets do not like this policy due to its impact on currency rates, the British pound could very well weaken against the euro in the coming weeks.  In the last 12 months, the British pound has fallen 17% against the euro.  Yesterday the pound was at 89.81 pence per euro; $1.4246 US dollar per pound; and 130.85 yen per pound. 

Most of the global talk right now is about Japan largely because it is the last economy to fall to the recession, so to speak.  With the widening trade balance and the rapid collapse of the Japanese auto industry, the real depth of the recession was made clear. 

The overall currency investment strategy right now focuses on risk aversion.  There will be days when money is moved into slightly riskier assets, but always with the understanding they can be moved back in a matter of minutes.  Currency volatility will not subside until there are clear signs the global economy is stabilizing…finally.