UK Pound Weakens in Face of Rising Budget Deficit

Posted February 25, 2010

The euro continued to weaken against most currencies as the Greece debt problem remains unsolved. Greece is facing another credit rating reduction if it becomes apparent the budget deficit cutting plan will not work. Hedge funds buying the yen lead to a stronger yen against major currencies. The UK pound weakened as the Bank of England indicates it may resume the quantitative easing program. The Brazil real and Mexican peso strengthened even as higher unemployment numbers are reported.

 

The Greece financial problems continue to drag down the euro. The euro fell against the yen to a twelve month low when it reached 120.44 yen yesterday. The euro also weakened against the US dollar to $1.3461.

Greece faces a possible downgrade in its credit rating. The rating is currently at BBB+ and further cuts are expected by the end of March. But yesterday’s big euro drop is credited more to hedge fund purchases of the yen rather than debt problems in the European Union.

Standard & Poor’s has given notice that it may lower Greece’s credit rating and expressed concern that the government will not be able to meet its budget reduction plan over the next three years. Greece will most likely need financial assistance to avoid default on its debt but the European Union commission that has been working on finding solutions to Greece’s financial problems has been unable to agree on any rescue packages.

Greece has experienced persistent government employee walk-offs in protest of budget cuts needed to reduce the budget deficit. The impasse is causing great concern that Greece’s government will not take the hard steps necessary to bring its finances in line with EU requirements. The situation is not hopeless though if the government should choose to maintain the austerity plan proposed and the financial picture improves. Further cuts in the credit rating will make it very difficult for Greece to borrow from the European Central Bank as bonds could no longer be used for collateral.

Though Greece has been overshadowing the currency markets, the news in other countries is not particularly good. The Federal Reserve Chair Ben Bernanke gave a state of the monetary policy report to Congress yesterday and the news was grim. He reported that interest rates will stay low for an indefinite period of time because of a weak job market.  Inflation also remains low. It has been said for many weeks that the high unemployment rate would be a drag on the economic recovery.

The US dollar weakened against the Japanese yen to 89.66 yen.

UK sterling reached a nine month low against the US dollar at $1.5332. Sterling also fell to 137.29 yen.  Sterling is feeling pressure as a result of the Bank of England indicating it may resume the policy of quantitative easing, The UK budget deficit continues to grow and that is adding vulnerability to the pound.

The UK budget deficit is now at 12 percent of GDP. What makes the UK different from Greece is that the UK can print more money to stimulate the economy and then withdraw the asset purchase program when the time is right.  Greece adopted the common currency euro and does not have the same opportunities.

There is a UK election in June and there is a lot of uncertainty as to who has the majority right now. If Prime Minister Gordon Brown is ousted there could be major monetary and economic changes in the UK coming.

The Brazil real rose to 1.8246 reais per US dollar. The unemployment rate in the nation increased in January to 7.6 percent.

The Mexican unemployment rate also reported a January increase to 5.3 percent. The Mexican peso strengthened to 12.8090 pesos per US dollar.

 

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