The Winning Loser Among Losers

Posted October 30, 2008

The world financial governments are now announcing one stimulus package after another. As a result, all major currencies strengthened against the US dollar.


Currencies are taking a front and center spot on the financial market stage.  Governments around the world are beginning to sort through their financial problems and new announcements about stimulus packages are being announced every day.  Japan has even joined the fray by telling the world it will be injecting yen into their financial markets and propping up companies already hit by sagging exports.

There is much discussion already about how much trust the developing and emerging financial markets will place in the US in the future once the economies are stabilized.  There has not been enough time to analyze the lessons taught by the mortgage collapse and the problems are far from over.  But there is already speculation that some countries will be taking steps to make sure their financial markets are at less risk of collapse if the US gets into trouble again. 

On the other hand, the US is still considered the world currency and it is also considered to be the most stable.  It remains the winning loser among losers, so to speak.  On 29/October/2008, in terms of US dollars, the euro strengthened to $1.2848.  Other currencies strengthening include the British pound ($1.6293); the Canadian dollar ($.8156), the Australian dollar ($.0103); the Japanese yen ($.0103); the New Zealand dollar ($.5849); and the Swiss franc ($.8796).  The Canadian dollar posted its largest single day gain in almost thirty years.

Interestingly, the Dow Jones Industrial Average (DJIA) closed 74.16 basis points down even though the US Federal Reserve cut interest rates to 1%.  The Asian markets soared with the news, but the DJIA surged and then began to taper off again.  The feeling among many financial experts is that this interest rate cut was not necessary.   If investors do not see the cut as having an impact on the economy or slowing down the slide into recession, there is no reason to respond. 

The US is still busy announcing new stimulus packages.  The newest proposal involves a mortgage guarantee program which will slow the rate of home foreclosures.  The US Treasury and Federal Deposit Insurance Corporation are proposing the government help banks refinance loans based on the homeowner’s ability to pay. 

Around the world, other economic news is also focusing on continuing to prop up the sagging economies.  The International Monetary Fund is making large loans to a number of emerging markets.  The People’s Bank of China has cut its interest rates again.  The Bank of Japan is expected to do the same.  The Investors also expect the Bank of England to reduce interest rates more than once before the end of the year.  In fact, interest rates around the world are expected to hit record lows before the close of calendar year 2008.

Now if the banks would only start loaning money to stable borrowers.  In the US, there are many fears the economic bailout money is only going to make the strong banks stronger and will lead to the demise of smaller community banks.  The community banks are not being offered any government capital and are like sitting ducks in a carnival game for larger banks to takeover. 

What is fascinating about this is the fact the original intent of the bailout money was to spur lending to consumers and between banks again.  Now Treasury Secretary Henry Paulson is handing out large amounts of cash to banking giants and financially sound regional banks with the clear understanding they can use it to accelerate the takeover process.  Consolidation of the banking system is going to produce even larger financial lenders with enormous power.  This will probably be repeated around the world.

There is so much still shaking out around the world.  But right now the US remains a winning loser when compared to emerging markets and countries like Iceland literally brought to their financial knees.