Toxic Assets Rearing Their Ugly Heads

Posted April 07, 2009

The yen and the US dollar strengthened yesterday as investors acted skittish once again and decided to seek safe haven assets. Currency action is a reflection of investor concerns over handling of toxic assets still sitting on bank balance sheets.


Toxic assets are rearing their ugly heads again after being put on the proverbial back burner for a while.  But ignoring these over-valued assets does not make them go away, and banks are facing enormous write-downs which are making investors nervous.  When investors get nervous, they turn to safer investments.

The yen and the US dollar strengthened yesterday against most major global currencies.  The yen strengthened to 100.14 yen per US dollar.  It also gained against the euro (135.49 yen).  The Bank of Japan kept its benchmark interest rate at .1% at a meeting today.

The US dollar also gained yesterday against the euro to $1.3264 US dollars per euro.  The greenback rose against the Aussie to 70.70 US cents and against the New Zealand dollar to 57.77 US cents.

Australia has been taking recent action in an attempt to stimulate the economy.  The Reserve Bank of Australia lowered its benchmark interest rate by .25% which places it at 3%.  This places the Australian borrowing costs at a low not seen in 49 years.  These moves should put the Australian dollar in a position of strength today.

Asian currencies fell as investors turned away from the equity markets and riskier emerging market assets.  The South Korean won fell to 2,322.50 won per US dollar.  This represents a 1% decline.  South Korea is making plans to sell dollar-denominated debt which will be listed Singapore.

Also weakening against the US dollar was the Singapore dollar (S$1.5091) and the Indonesia rupiah (11,335 rupiah).

The Taiwan dollar weakened to NT$33.569 against the US dollar.  Also weakening was the Malaysia ringgit reaching 3.5860 ringgits per US dollar.   The Taiwan dollar decrease was the biggest drop seen since 17-February-2009, and it reflects concerns over the ability of the global stimulus programs to bring the recession to a halt.  Exports continue to decline in the Asian countries.

The Swiss franc strengthened against the euro in response to falling stock markets.  The franc rose to 1.5188 francs per euro.  It also strengthened against the Swedish krona (7.1618 krona per franc).  The Swiss National Bank has made several recent moves to slow the recession including lowering the interest rate to almost zero.  In addition, the bank has started buying foreign currencies in order to slow franc appreciation.

Canada’s dollar has been under pressure as oil prices weaken and the global economy shows little signs of improving at this point.  Canada’s economy is heavily dependent on commodity exports.  The Canadian dollar fell to 80.22 US cents.

This leads to the issue of toxic assets.  The International Monetary Fund has raised its estimate of the global value of toxic assets still sitting on the bank balance sheets.  Until the value of these assets is resolved, there will not be an end to the recession.  Banks and insurers are not going to begin lending at normal levels until it is clear what the government intends to do about valuating and eliminating these debts.  The IMF now places the toxic asset value at $3.1 trillion for just the US originated assets.  There is another $900 billion in toxic assets originating in Europe and Asia.

As US Treasury Secretary Geithner spoke yesterday about the intention of the US government to control the executive staff of companies accepting TARP funds and to punish any company that commits mortgage fraud, the DJIA fell.  The recession is far from over and the uncertainty US businesses face in terms of new government regulation and the continued existence of toxic assets is causing new investor fears.