Stuck In the Corner

Posted January 06, 2009

The US dollar made significant gains against the euro and Japanese yen, while sterling also strengthened against the euro. The euro declined significantly as investors absorbed the news of anticipated interest rate cuts.


The currency and equity markets are beginning to show indications investors might be getting a bit hungry for some increased risk again.  Who can blame them when they had to bury their money over the last month in US Treasury securities paying zero percent in order to minimize the risk of loss?  You can’t make any money that way which is a fact the US will have to face when it comes time to raise funds to cover the heavy government debt being incurred in response to the recession.

The euro weakened significantly against the dollar, falling to $1.3635 late yesterday, 5/January/2008.  The primary reason for the major decline in the euro price is the expectation the European Central Bank will probably lower interest rates again on 8/January/2009 form 2% to 1.5%.  The euro zone continues to experience deteriorating economic conditions which means additional government intervention will be necessary.

Interestingly, the more government intervention promised in the US, the more investors turn to the US dollar despite the massive debt load it creates.  President-elect Obama’s proposed economic stimulus package is seen as a possible market stabilizing plan which will lead to a stronger US dollar.  On the other hand, financial analysts are the first to say they really have no idea if the multi-billion dollar plans will work or will only add to an unmanageable national debt.

Have you ever heard the expression “paint yourself into a corner”?  That is how some investors view the government stimulus plans now.  The initial cash injections may have been necessary, but the continued cash printing is painting the entire global financial system into a corner. 

The US dollar gained against the Japanese yen (JPY93.6) also.  Japanese investors are busy repatriating their money invested overseas as a result of the declining price of the yen.    The euro fell against the yen to JPY127.31.

With the significant decline in the euro paired with the US dollar, it was no surprise the UK pound also gained against the euro.  The sterling strength came form the investor expectations of the European Central Bank interest rate decrease in January.  The pound strengthened to 93.80 pence per euro.

The British pound also rose against the US dollar yesterday to $1.4615.  The British government has indicated it may provide guarantees to bank asset-backed securities.  The primary goal would be to get banks to increase lending rates.

With the increase in the price of a barrel of crude oil, Canada’s dollar gained strength against the US dollar.  Crude oil prices reached $48.48 a barrel which is approximately $11 higher than the price just a week ago.  In 2008, the Canadian dollar fell 18% against the dollar due to oil and other commodity price declines.  Yesterday, the Canadian dollar strengthened to $.8406 against the US dollar. 

The Asian currency prices were a mixed bag.  Many of the countries are experiencing deepening recessions due to dropping export rates.  The Thailand baht fell against the US dollar to $.0287 yesterday.  The Malaysian ringgit was priced at $.2860 when paired with the US dollar.   China’s yuan also weakened against the US dollar to $.1463.

The Bank of Thailand is expected to cut its benchmark interest rates again also.  In Malaysia, Taiwan, Indonesia, Singapore, China and Vietnam, the stories are very similar.  The countries are dealing with falling exports and slowing economic growth.

The equity markets were very quiet for one more day as 2009 unfolds.  The Dow Jones Industrial Average fell by 81.80 points to close at 8,952.89.  The FTSE 100 rose a mere 17.85 points to 4,579.64 and the NIKKEI fell by a small 46.16 points to 9,089.28.  The whimpering sound you hear from the stock markets is the sound of investors wondering when all that government cash injected into the global economies is actually going to start working so they can recoup some of their losses.

The governments have their paintbrushes out as the Treasury printing presses heat up.  It is hoped they don’t find themselves in that corner holding all that debt with no takers when it comes time to raise funding.