Posted October 20, 2009
The UK pound began to strengthen once again against the US dollar. The US dollar continued to weaken as investors shed safe haven assets. The Canadian dollar and Russian ruble rose as oil prices edge up once again. The South African rand is strengthening on rising commodity prices.
The UK pound began to strengthen against the US dollar once again as investors decided the Bank of England quantitative easing program will probably remain on suspension through next month. But the Bank of England has also made it clear the bond buying program can be restarted quickly if the economy appears to need another jump start.
The UK is predicted to experience a .9 percent growth for the 4th quarter 2009 by some estimates. Reports are expected to show a .2 percent growth in the 3rd quarter over the 2nd quarter. But financial policy makers and economists are warning that withdrawal of a loose monetary policy should not occur too soon or the economy could fall back into the doldrums. Inflation is not a factor yet.
Sterling recovered .7 percent yesterday against the dollar and reached $1.6404. It remained steady against the euro and ended the day at 91.13 pence.
The US dollar fell against the euro to a 14-month low as the Euro-Zone recovery gains speed while the US economy remains sluggish. Earnings reports issued yesterday clearly show an improving economy but the high unemployment rate is keeping a damper on full growth.
The US is also getting a lot of criticism for racking up such a high deficit of $1.42 trillion. The deficit is expected to climb for another year which will make it very difficult to implement tax increases and budget cuts high enough to lower it. In addition, there are increasing concerns around the world that the current administration and Congress do not have the will to make these kinds of tough decisions. The weakening US dollar and rising US debt is adding volatility to the markets that did not exist to this degree prior to the recession.
The US Federal Reserve is currently working on an exit strategy to withdraw the bolstering cash bailouts given to banks to prevent collapse at the start of the recession.
Investors are clearly turning to emerging markets and other investment opportunities with higher yields and turning further away from safe haven investing. The US dollar fell to $1.4981against the euro and against the Japanese yen to 90.33 yen.
The Australian housing market is improving and the Australian dollar was at 92.95 US cents. The Aussie has been steadily strengthening over the last couple of weeks. The central bank recently raised the benchmark interest rate to 3.25 percent and is expected to do so again in the near future. Interest rate increases could lead to the US dollar and Japanese yen being used for carry trades.
In other currency news, the Canadian dollar strengthened against the US dollar to C$1.0294 as oil prices continued to rise for the 3rd week to $79.30 per barrel. The Bank of Canada meets tomorrow and will discuss the timing of interest rate increases. The Canadian dollar has been approaching parity with the US dollar in recent weeks and has a 50/50 chance of hitting it within the next month.
The Russian ruble rose against the US dollar also on rising oil prices. The ruble is at 29.3104 rubles per US dollar. Oil prices have almost doubled over the last 8 months.
The South African rand strengthened against the US dollar to reach 7.3432 rand per dollar. The rand has become the second best emerging market performer behind Brazil and it is expected to continue strengthening between now and the end of the year. Rising commodity prices are largely responsible for a stronger rand.