Small Currency Response to General Motors Bankruptcy

Posted June 01, 2009

The giant US auto manufacturer is filing bankruptcy today but the market has already priced this event in. The yen rose against all 16 major globabl currencies while the euro weakened against all but one.


The big news this morning is the bankruptcy of what was once the largest auto maker in the world – General Motors.  It is an end of an era, but for investors, it was also time for the company to move on to whatever new form it was going to take.  The general opinion is that the impact of 20,000 new job claims and the shutdown of dealerships and parts suppliers in the US and other supply companies have already been priced into the markets.  It is an indication of exactly how ready everyone is for the bankruptcy of GM.

The GM bankruptcy represents the largest manufacturing bankruptcy in the history of the United States.   The company is in such poor condition it is going to take another $30 billion of additional government funding just to restructure.

The yen and dollar rose over the weekend as investors continued their search for more profits.  The US dollar had hit a five month low last Friday, 29-May-2009, so the weekend rise was more of a recovery than anything else.  On Friday the euro went over the $1.40 mark for the first time this year reaching $1.41 against the US dollar at one point.

The US economy is clearly continuing to put out signs a recovery is in the making though analysts and government officials are cautioning that the recovery will be very slow.  The US dollar mostly held against the yen, weakening slightly over the weekend, and reached 93.85 yen per US dollar. 

The US dollar also strengthened against the .DXY to $1.4168.

The yen rose slightly against the dollar but advanced against all of the 16 major global currencies.  The yen rose against the euro to 134.07 yen per euro.  The yen rose as investors sought safe haven while digesting the news about General Motors.

The euro, on the other hand, fell against all but one of the 16 major global currencies over the weekend.  It weakened against the UK pound to 87.20 pence per pound. 

The European Central Bank is buying 60 billion euros worth of bonds this week.  This follows the same quantitative easing policies currently in force in Japan and the UK.  There is uncertainty as to how much the ECB will expand its use of the quantitative easing program and that is what dragged the euro down.

There is growing concern over the US government debt.  South Korea has indicated it will reduce its US Treasury securities holdings over the next five years.  China has been expressing concern over the safety of its US investments for many months now.  The growing US budget deficit is considered to be out of hand at $1.85 trillion projected this year alone.

US Treasury Secretary Timothy Geithner is in China to hold talks.  He pledged to the Chinese that the US will reduce its debt.  He did bring up the topic of the Chinese managed exchange rate program for the Chinese yuan.  This is a contentious topic between the two countries.  Geithner asked China to let the yuan rate be set by the free market. 

It is interesting to note that the US is advising China on its yuan management when at the same time the US is forced to buy its own debt to cover the massive dollar printing program in effect.

The Mexican peso strengthened significantly over the weekend to 13.0406 pesos per dollar.  As the worst of the US recession appears to over, the peso is benefiting from the expectations of an improved export market in the coming months.  The peso strengthened enough for the country to reduce its selling of US dollars at auction by $50 million.