Time Will Tell

Posted March 09, 2009

The UK government took a stake in the Lloyd’s Banking Group Plc despite hopes it would not be necessary. The UK pound weakened against the US dollar with the dollar strengthening against most major global currencies as investors continue to seek safe haven investments.


It is impossible to ignore the fact the global banking system remains in deep trouble despite the billions in currencies which have been pumped into them.  Credit remains tight, but that is really not the biggest problem right now.  The primary problem is the fact the toxic assets remain on the balance sheets of banks and are making it impossible for financial markets to move forward.

The UK government had to take a majority stake in the Lloyd’s Banking Group Plc despite a desire to avoid such an action.  This sent a clear signal to the markets that banks are continuing to be financially stressed in a deepening recession. 

The pound weakened against the US dollar to $1.3816 which means the pound broke through the $1.40 rate to a new 6-week low.  The pound also weakened against the euro (91.42 pence per euro), the Japanese yen (136.69 yen per pound), and the Swiss franc (1.6048 francs per pound). 

The Bank of England has made plans to buy 75 billion pounds of gilts and corporate debt as the government tries to prevent further economic declines.  The UK has initiated a policy of quantitative easing in the hopes additional currency in the markets will begin go to loosen credit, lower interest rates, and improve banking stability.

Japan is continuing to deal with the current-account gap.  The yen fell against the US dollar and the euro.  While the UK pound fell in another part of the world, the yen weakened against the US dollar to 98.84 yen per euro and it also fell against the euro to 124.61 yen per euro.

As the normally safe haven yen weakened, the US dollar took center stage as the risk aversion currency.  It strengthened against almost all of the major global currencies including the pound, euro, yen, and the Canadian dollar.  The Canadian dollar weakened against the US dollar to C$1.3064.

In fact, the Canadian dollar has fallen to a level against the US dollar not seen since 2004.  Canada is dealing with a lower demand for commodities and the weak US economy.  The government is considering a policy of quantitative easing in order to generate lending by banks.

The Brazil real was a bright spot in the currency markets for those looking for signs of economic recovery.  The real had weakened 23% against the US dollar in the past year.  It has begun to recover and has seen a 3.9% increase in just the last 3 months.  The Brazil real strengthened to 2.3802 real per dollar and the country is seen as taking aggressive and successful action to improve its economic picture.  Brazil has taken aggressive interest rate reductions which are drawing investors.

It is impossible to ignore the fact the US stock markets fell once again.  The markets are clearly not convinced the stimulus packages are going to help.  In fact, there is growing concern the huge amount of debt being incurred is going to prolong the recession and then the ability to recover.  There was another analyst opinion offered which said, in the long term, the global economy needs to reduce it reliance on the stability of the US currency for value. 

This might be simply doomsday talk or it might be further proof that the financial markets are going through a deep and enduring change that extends beyond just current currency values or interest rates.  Already there have been political changes at the highest levels, with more are coming, that have been attributed to this recession.

In the end, as usual, time will tell.