Slippery Slope

Posted January 14, 2009

The US dollar weakened against the UK pound and the euro. The US retail sales and manufacturing report is expected to show a continued slide into a recession.


There is a Joni Mitchell song that croons about looking at life from "both sides now" and that could apply to currencies.  On the one hand the US dollar strengthened against the UK pound ($1.4822) and the euro ($1.3141).  On the other side of the picture, the US dollar weakened against the Australian ($.6703) and New Zealand dollars ($.5545). It is a mixed bag in the currency world as investors continue to cope with the recession and consistently bad news. 

The US dollar weakened against the euro primarily due to expectations the US retail sales and manufacturing report due this week will show the US is still on the slippery slope of recession.  Federal Reserve Chairman Bernanke made the comment that the stimulus packages are not working which was a bold statement that verified what nervous investors had figured out on their own.  Actually, to be precise, Ben Bernanke said the following: 

"More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets." 

In other words….what government has done so far in terms of bailouts and stimulus legislation may have prevented an immediate depression, but they are not going to result in a long term recovery nor do they seem to be unfreezing credit.  This was not good news for the US or the global markets who were still hoping the first signs of a real recovery would begin to appear in 2009.  Optimistic analysts are still saying a turnaround could start the third quarter of 2009, but many optimists are converting to pessimism. 

The UK economy is not in any better condition.  The UK pound fell against the euro to 90.20 pence per euro.  It also weakened against the Japanese yen.  The pound was at 132.24 yen per pound late yesterday.  

The weakening of the pound is due to government reports indicating the recession is still deepening.  The Department for Communities and Local Government reported home sales have slumped to a level not seen since 1978.  Home prices are also continuing to decline which has dire implications for a banking and mortgage financial system still trying to find solid ground.  In the 2008 fourth quarter the UK economy contracted by 1.5%. 

There are some countries that had one piece of good news.  The major exporters of oil such as Canada and Russia were glad to see the price of a barrel of crude oil rise for a change.  It reached $39.25 a barrel late 13/January/2008.   A rise in commodity prices also benefited Australian (60.50 yen) and New Zealand 49.80 yen) currencies when paired with the Japanese yen.  The strengthening of these two currencies against the yen ended a four day decline.  

Of course the rise in the price of oil does not help many countries.  An increase in heating and fuel costs coupled with slowed consumer spending in the US has led to a decline in imports from countries such as Mexico, China and many of the Latin American countries.  The Mexican peso weakened against the US dollar to 13.7718 pesos per dollar.  Mexico's economy is heavily dependent on export orders to the US.  

As has been reported, there is really no assurance the old financial operating rules are still effective.  Private and government analysts do not have enough historical data yet to do a technical analysis which could lead to formulations of more effective responses to the recession.  The mortgage meltdown has been an unprecedented economic crisis and its implications will most likely last for years and result in new operating rules. 

Until then…let's hope the stimulus packages being introduced around the world put a stop to further declines in the economies.