Thawing the Frozen Credit Markets

Posted March 23, 2009

The US announced a plan to rid bank balance sheets of the toxic assets which led to the dollar weakening against major global currencies and the stock markets soaring. Around the world everything seemed to strengthen except the yen and dollar.


It seemed that on 23-March-2009, everything rose except the US dollar and the yen.  Stock markets and global currencies strengthened making most investors smile today.  It was nice to see some good news for a change in the financial markets and it provided one of the first glimmers of hope that the recession is finally seeking bottom.

Why the glee?  The US Treasury Secretary announced (finally) a plan to remove toxic assets from bank balance sheets which will hopefully lead to a thaw in the frozen credit markets.  The plan is an unusual one in that it is a public-private arrangement.  In a few words, here is how the plan will work.  A public investor pays $7 for every $100 of a bad mortgage.  The US government matches the investment with another $7.  It doesn’t take a mathematician to determine there is still $86 and that is the amount the federal government will loan and insure through federal institutions.

Will it work?  No one knows (again).  The US government will be insuring close to a trillion dollars of bad mortgages.  That sound you hear is the sound of the US printing presses printing more devalued US dollars.

Though stock markets and most global currencies rose yesterday, the US dollar and yen weakened.  Both currencies have lost some of their appeal as safe haven assets as investors showed some confidence in the financial markets.  The Dow Jones Industrial Average rose 497.48 points which was an enormous 6.84%.  The NIKKEI also rose by 170.35 points.

But the US dollar depreciated against the euro to US$1.3642 per euro.  The dollar weakened against a number of global currencies.  For example, the US weakened against the Australian dollar (70.38 US cents); the New Zealand dollar (57.09 US cents); the Norwegian krone (6.2707 krone per US dollar); and the South Korean won (1,392.22 won per dollar).

The Japanese yen weakened also against most global currencies due to its status as a safe haven asset.  When investors decide to take on more risk, the US dollar and yen are the first currencies to be abandoned.  The yen fell against the euro to 132.44 yen per euro.  It also fell against the US dollar to 97.08 yen per US dollar.  The Australian and New Zealand dollars strengthened against the yen to 68.27 Aussie per yen and 55.41 kiwis per yen.  

The UK pound also rose against the euro for a change as more proof investors are looking for some risk again.  It reached 93.62 pence per euro. The pound also saw close to its highest monthly value when paired with the dollar when it hit US$1.4648.

China has been making public statements directed at the US which are giving notice the US should not be confident about China’s willingness to buy additional Treasury securities at an accelerating rate in the future.  The trillions of dollars of US debt being incurred to halt the recession must be financed somehow.   If it is not, the US government will have to print more money to fund the debt which could lead to currency devaluation and inflation.

China has been establishing currency swap agreements with other Asian countries.  It has current agreements with South Korea, Hong Kong, and Malaysia and just came to an agreement with Indonesia.  Thirteen Asian nations including China have created a foreign-exchange reserve account for currency protection.  Analysts agree these agreements are first steps towards making China’s yuan a world reserve currency.