UK Pound Weakens on Soft Economic Recovery

Posted March 01, 2010

The Japanese yen weakened against the euro on signs of deflation. The euro weakened against the US dollar as investors wait for news of a financial rescue package for Greece. The euro rose against the UK pound as the UK economic recovery remains soft. The Australian dollar advanced against the US dollar on expectations of an interest rate increase. Chile’s peso advanced against the US dollar on copper revenues.


The yen weakened against the euro as Japan considers expanding its quantitative easing program. The yen fell to 121.9 yen against the euro and to 89.08 yen per US dollar.

Japan is facing deflation pressures and the Finance Minister told policymakers that additional measures are needed to prevent a downward price spiral. Consumer prices fell in January by 1.3 percent. This represents 11 months of decline.

The euro weakened again to $1.3606 against the US dollar. Once again, it is the problems with Greece that are causing the euro to weaken beyond what was expected. Increasing pressure is being put on Greece to do more to resolve its budget deficit. Greece is in the unfortunate position of having the largest budget deficit among European Union members.

The euro has been pounded the last two months due to budget deficits among member nations.

The real concern though is the underlying problems that led to the large budget deficit. It will not benefit the EU to offer Greece a financial rescue package if little has been done to correct the policies that led to the deficit over the years.

There are clear signs that a financial package is being developed by the European Union that will involve 25 billion euros in aid to Greece. This is despite warnings from Germany that no aid would be given so apparently Germany has softened its stance to protect the euro.

But Greece is being asked to do more about reducing its budget deficit. The aid being considered can be used to finance debt, but the aid won’t be released until the EU sees a tough plan put in place by Greece to reduce the budget deficit. Greece is having problems establishing a reduction plan as government workers continue to hold strikes objecting to government spending reductions.

The euro rose against the UK pound to 89.73 pence per euro. The UK economy remains weak as policymakers consider expanding their program of quantitative easing.

British elections are to be held in June and the current government was hoping for better economic data by now. Sterling fell to a 9-month low when paired with the US dollar and reached US$1.5129.  The pound also hit a 12-month low of 134.50 yen.

The Australian dollar advanced against to 89.77 US cents. The strengthening Aussie reflects an economy that is recovering at a faster pace than predicted. In addition, the US economy continues to falter with a Labor Department report due on Friday expected to show unemployment rising again leading once again to a weaker US dollar against the Aussie.

The central bank could raise the Australian benchmark interest rate as soon as tomorrow. Speculation is that the rate will go up by 25 basis points.

Chile’s peso rose to 522.75 pesos per US dollar. Chile’s peso weakened after the earthquake as copper mining operations were suspended. But copper revenues are expected to help the economy recover from the recession and will replace falling export revenues. Chile holds the honor of having the highest rated Latin American debt and a well managed economy. The peso is expected to continue advancing through 2010.