Still No End in Sight

Posted March 29, 2009

The upcoming G-20 meeting is getting the most attention this week as global countries seek ways to find the recession bottom. The US dollar and yen strengthened over the weekend in response to investors returning to investing in safe haven assets.


Despite some weak signs in the United States the recession may be finally seeking a bottom, the European recession is clearly still deepening.  In the UK, the GDP contraction numbers for the 4th quarter 2008 were revised downward.  The Euro-Zone reported industrial orders fell 34% in January 2009 compared to January 2008.  German CPI data revealed the largest Euro-Zone economy has slowed to .5%.

The impact on currencies has varied though been predictable in many cases.  The US dollar and yen strengthened against the euro as investors began to seek safe haven assets once again.  The US dollar rally advanced the most against the euro in response to the plunging industrial order data for the euro area.

The US dollar strengthened against the euro to $1.3292.  On the other hand, it weakened against the yen (97.92 yen).  Though the dollar weakened against the Australian dollar (69.31 US cents) and the New Zealand dollar (56.99 US cents) as of 27-March-2009, by Monday morning the Aussie and kiwi had slid some against the greenback.

The yen strengthened to 130.15 yen per euro.

The UK pound was battered as the economy continues to get worse.  It fell intraday 27-March-2009 against the US dollar to $1.4269 which is the lowest level seen in almost 2 weeks.  Sterling also weakened against the Japanese yen to 140.17 yen and against the euro to 92.87 pence per euro.

The anticipated G-20 meeting is getting a lot more attention than some of the past meetings have received.  For one thing, US President Barack Obama is making his first official overseas trip since taking office and will attend the meeting.  In addition, the UK economy is in need of a turnaround in the European economic conditions, and decisions made at this meeting concerning stimulus spending will have a direct bearing.  Also up for discussion is the fact China and other Asian countries are calling for a new world reserve currency.

There is a philosophical difference between the US and Europe in terms of how to address the recession.  The UK has increased stimulus spending to the point where debt equals 10% of the GDP whereas other European Union countries are resisting the calls for incurring more debt.  In fact, Germany has made it clear it expects the 27 nations of the European Union countries to adhere to the agreed debt-limit rules.  This has increased speculation that the US and Europe have a major financial division that may be impossible to overcome.

The Brazil real weakened against the US dollar to 2.2885 real per US dollar which is a 1.8% decline.  It fell in response to the poor economic data coming out of the European Union countries.  The European Union is the biggest export market for Brazil so the deepening recession is putting downward pressure on the emerging market currency.

Investors and traders will be looking for the G-20 meeting to produce a global plan for ending this recession.  That is unlikely as President Obama has made it clear he is backing stimulus spending and increased budgetary debt as the foundation of the US recovery plan.  This means the G-20 is unlikely to produce a coordinated response to the market and economic financial instability which persists.

Though the US has begun implementing a plan to remove toxic assets from bank balance sheets, the European Union countries have not followed suit.  US Treasury Secretary Geithner believes that until this particular event happens it will not be possible to end the global recession, because the toxic assets are preventing the flow of credit.

Despite the weak signs the recession may be finding bottom in the US, the unemployment figures continue to rise and might reach double digit.  The recession is far from over and there are many financial hurdles to overcome yet.  Until the markets stabilize, the volatility in both the currency and equity markets will continue.