The US Dollar Gets No Support From the G-7

Posted October 05, 2009

The US dollar did not get the vote of confidence it hoped for from the G-7. The dollar continues to weaken against most major global currencies. The Brazilian real strengthened as the nation posted a positive weekly trade surplus. Canada’s dollar rose as commodity prices increased.


The US dollar weakened to $1.4691 against the euro and to 89.02 yen.  Japan indicated yesterday it would not intervene in the yen/US dollar exchange unless the yen fell to 80 yen against the dollar. Japan’s new controlling party is focusing on ways to stimulate the economy on the belief the exiting party was not doing enough to protect Japanese interests.

The euro is showing signs of strength on the speculation the German August manufacturing orders increased again making the 6th straight month. Germany is clearly on the rebound which bodes well for the Euro-Zone. The official report is due to be issued this month.

Oil prices in October have been drifting lower again and reached $68.41 a barrel yesterday at its low point. It had rebounded to over $70 a barrel by the end of the day. Other commodity prices such as natural gas rose as did the price of gold.  This has driven up currency rates for commodity based economies like Brazil and Canada. Some analysts predict gold will reach $1,500 an ounce within a year.

The Brazil real strengthened to 1.7745 reals per US dollar.  This makes a 30 percent rise this year and the real is the best performing emerging market currency. Brazil was awarded the2016 summer Olympics games which has also boosted the nation’s markets.

The G-7 disappointed the US when it refused to issue a statement intended to slow the US currency’s downward slide. The group also would not address the issue of the need for a strong dollar in the future.  There are ongoing efforts spearheaded by China to reduce global dependence on the US dollar. The G-20 group encouraged China to proceed in its plans to strengthen the yuan and expand its use as a trade settlement currency.

Brazil reported a trade surplus for the week ending 4-October-2009 in the amount of $415 million. Demand for the real has been growing as investors seek higher yielding assets. The move away from safe haven assets was partially fuelled by US economic data showing growth in service industries in September. The index of non-manufacturing businesses in the US rose to 50.9.

Venezuela’s bolivar weakened against the US dollar due to excess demand for government bonds.  In fact the demand was six times the amount of bonds available for sale. Investors buy the bonds with bolivars and resell them for US dollars in the international markets. This is a way to obtain dollars when unable to get permission from the government to purchase them in the currency market. Venezuela operates under Chavez-imposed currency controls.

Also benefitting from the move to higher yielding assets is Canada.  Canada’s dollar, nicknamed the loonie, rose to C$1.0722 against the US dollar. The loonie benefitted last week also as commodity prices rose and the International Monetary Fund increased its economic forecast for Canada.