Up and Down....and Sideways

Posted December 19, 2008

The US dollar strengthened against the euro and yen in reaction to ECB interest rate cut announcement. The Ukraine battles to prevent collapse of hryvnia.


That is the best way to describe the currency, equity and commodity markets right now.  One day the US dollar is weakening precipitously against the euro and yen and the next day it begins a rise that changes the whole picture.  Much of the currency price activity is tied right now to specific announcements made concerning actions to be taken to stop the tide of bad economic news. 

For example, the US Federal Reserve cut the benchmark interest rate to zero percent.  At first investors and analysts were waxing poetic about the intelligence of this move.  The next day they decide that banks are already effectively loaning funds between themselves at zero percent interest so there is not going to be much of an impact on the recession as a result.  In the meantime the US dollar sinks rapidly in reaction to the news as investors begin a dollar sell-off.  With a zero percent federal funds interest rate, investors really didn't see much advantage to maintaining holdings in US dollars versus other currencies. 

That was two days ago.  Yesterday the European Central Bank announced it will cut its interest rate again which is what analysts said they should be doing.  The result is the dollar rose on 18/December/2008 against the euro ($1.4303) and the yen ($.0111).  The dollar strengthening represented a change in the dollar sell-off activity.  As currency strategist Michael Woolfolk at Bank of New York Mellon Corporation said, "ECB is obviously fighting the surge of cash out of dollar deposits into euro deposits since the Reserve's surprise rate cut earlier this week." 

Up and down and sideways….  So where does the sideways come in?  "Sideways" can be found in the movements in the gold and silver markets.  When the US dollar price goes up and down, the gold and silver prices work in an opposing manner.  Precious metal investments become less appealing when the dollar rebounds. 

The US dollar actually strengthened against more currencies than the euro and yen.The US dollar strengthened against Great Britain pound ($1.5048); the Canadian dollar ($.8322); the New Zealand dollar ($.5885); and the Australian dollar ($.6929).  In general, the US dollar strengthened by 2.2% against the basket of 6 currencies made up of the four currencies just listed plus the yen and euro. 

The emerging markets are also continuing to battle recessionary economic conditions.  The Ukraine central bank made an announcement it was raising refinancing rates to 22% and this led to a strengthening of the nations currency.  The Ukraine hryvnia (currently 8.0925 per US dollar) has fallen 46% against the dollar just since July 2008.  The Ukraine government is looking for ways to prevent foreign currency loan defaults.  The Ukraine financial system is in deep trouble and is ranked as having the 4th highest credit risk rating in the world.  The country's banking system was kept afloat by a loan from the International Monetary Fund , but the IMF will only continue the loan agreement if the hryvnia rate is seen as defensible. 

The Russian ruble is also embattled.  The government is in the process of devaluing the ruble in order to protect any further depletion of reserves.  The ruble has weakened against the dollar and the euro.  The ruble is reported at 27.8412 per dollar and 39.1772 per euro. 

By the way, the Dow Jones Industrial Average saw another triple digit drop by 219.35 points yesterday to 8,604.99.  The drop was due to energy stock declines, a negative outlook rating for General Electric, and concerns about whether the Fed interest rate cut will have any impact. 

Some analysts say the markets are in the process of stabilizing despite the triple digit swings and the sudden currency price shifts.  So right now all you can do is be prepared to quickly respond to news that makes markets go up and down….and be ready to invest sideways.