Step to the Back of the Line

Posted February 13, 2009

Australia is the latest country to pass a stimulus package to prevent entering a recession leading to a strengthening of the Australian Dollar. The UK pound fell again against both the dollar and the euro as the economic picture worsens.


There are some queues where you want to be at the very end.  For example, being at the end of the line of countries that have declared a recession is very good.  Australia is one country at the end of this line.  Australia has never officially entered a recession unlike most other major global economies and is taking a number of proactive steps to prevent it from happening. 

Yesterday, the Australian Senate approved a stimulus package equating to A$42 billion which will be used to promote continued economic improvements.  The country had a surprising increase in employment figures and is doing quite well considering its reliance on foreign exports.  The Australian dollar strengthened to 59.86 yen per Aussie. 

The Reserve Bank of Australia has also taken aggressive steps to aid the economy.  The bank cut its interest rate to 3.25% which is a rate not seen since 1964.  The stimulus money will be used to give cash to Australians in economic need meeting income tests.  There will also be a number of infrastructure improvements completed such as building new roads and improving energy efficiency. 

The yen fell against the US dollar because the flickering signs of life in the US economy and the expected passage of the latest stimulus bill are leading to less risk averting strategies among investors.  The yen weakened to 91.05 yen per US dollar.  It also weakened against the euro to 116.95 yen per euro. 

The weakening of the yen is a good sign in the sense it means investors are willing to dip their toes into the financial markets again to see if there are any sharks left in the ponds.  The massive amounts of government spending around the world are apparently beginning to take affect, but the next crisis predicted is inflation that will roar and rage like the terrible wildfires Australia is currently experiencing. 

The UK pound is still under pressure and has slid 3 days in a row against the US dollar and the euro.  The pound weakened to $1.4234 against the US dollar which was a sizable decrease.  It also fell against the euro to 90.10 pence per euro.  To round out the trio, the sterling fell against the yen also to 128.91 yen per pound.   Some analysts are predicting it could fall as low as $1.35 but it seems to somehow manage to recover before seeing that value for any period of time. 

The pressure on the pound is due to the fact the economy is still continuing to weaken with fears of a depression looming unless the slide can be reversed. 

The Brazilian real was the Latin American currency which weakened the most against the US dollar.  Brazil responded with pessimism to the proposed US stimulus package leading to a rate of 2.2692 real per US dollar. 

The Swiss franc is also declining against the euro as the Euro-Zone continues to grapple with the economic crisis.  The franc fell to 1.4964 francs per euro. 

The G7 is meeting right now and will talk about currency exchange rates this time.  The members do not like to talk about currencies being on the agenda because it ignites worries about currency intervention. 

The US Congress is expected to pass the stimulus compromise bill today or tomorrow and send it to President Obama for signing.  Though consumers are anxious for government assistance during these difficult times there is growing fear the US is setting itself up for debt funding problems.  The US debt is a massive beast that needs to be regularly fed with foreign investment.  Some figures show the total debt is currently 45% foreign funded with China accounting for 60% of that total.

The US apparently wants to be in the front of the line where debt is handed out.