Truth or Dare?

Posted March 12, 2009

The yen strengthened against the US dollar on 11-March-2009 which interrupted the dollar’s rise this week. The yen and US dollar rose against most major global currencies due to a variety of economic news.


Investing in the stock markets is like a game of truth or dare.  Do you know the truth about the global economies and do you dare invest without losing more of your portfolio?  The yen and dollar have safe haven currency status, but there have even been concerns the Japanese yen could lose that ranking in the currency world if the country goes into a true depression. 

And what is the truth about the euro?  Are some countries in the Euro-Zone considering abandoning the euro?  There has been some speculation along these lines, but German Finance Minister Peer Steinbruck cam out yesterday and said the currency bloc is not going to break up and such talk is absurd.  After ten years of currency and economic development, it could be expensive and dangerous for the union to break up and especially during a recession in full swing.

But it’s important to understand the discussions going on in the world of currencies because of the intricate relationships in the forex market. 

Japan’s currency strengthens on global economic news, but the long range expectations are the currency will probably be unable to strengthen to its 2008 levels during 2009.  At this point this would require an 8.2% recovery against the US dollar. The economic forecasts for Japan are showing a prolonged GDP contraction can be expected and there is also political turmoil which could lead to new financial policies.

Yesterday, 11-March-2009, the yen gained over one percent point against the US dollar.  This was partly due to the news the 4th quarter 2009 GDP contraction was revised down to 3.2% from 3.3%, but this did not change economic forecasts for 2009.  The yen strengthened to 96.19 yen per US dollar and also to 123.42 yen euro. 

The Japanese yen rose against all of the major global currencies as a matter of fact as did the US dollar.  The dollar gained against the euro to $1.2845 per euro and reached $1.3893 against the UK pound.  But when you look at the US dollar against the Asian currencies there was a different picture evolving.

The Singapore dollar strengthened to S$1.5292 against the US dollar. The strengthening was based on the speculation the US banks are stabilizing financially which is good news for Asian economies so heavily dependent on exports to the US.

In fact, a host of Asian currencies strengthened against the US dollar including the Indonesian rupiah (11,983 per dollar) and the Taiwan dollar (NT$34.467 per dollar)

The Australian dollar also strengthened against the US dollar though the gains reflected a price slowdown with the news Australia’s February 2009 unemployment reached 5.2%.  The loonie advanced to 65.07 US cents. 

The New Zealand currency put in a strong performance against the US dollar and the yen yesterday.  The kiwi strengthened to 51.42 US cents and to 49.96 yen.  The gain was a response to the cut in the country’s benchmark interest rate to 3% by the central bank.  The bank does not expect to continue to lower rates to near zero though as countries like the US have done.

Just as a note of interest, fund manager Bernie Madoff pleads guilty today to eleven different federal charges including fraud and money laundering as result of operating a Ponzi scheme which bilked his customers around the world of billions of dollars.  His clients included individuals, charities, and hedge and investment funds and his actions contributed to banking problems during a time they could ill afford more losses.  Many of his clients lost their life savings including all retirement monies.  It is expected he will spend the rest of his life in prison with no chance of parole. 

As the US banking system begins to show some signs it may have hit bottom in terms of financial losses, analysts are warning the recession is far from over.  The currency market is acutely aware there are many issues yet to be resolved including the inability of Eastern European countries to repay foreign debt.