US Bank Proposals Trigger Flight to Yen for Safe Haven

Posted January 22, 2010

The yen strengthened against most global currencies as US President proposes restrictions on US banks. The Australian dollar weakened against the US dollar as China raises interest rates. Canada’s dollar fell as oil prices decline. The UK pound falls against the US dollar, yen, and euro as the nation’s budget deficit widens. The Mexican peso weakened as investors abandoned riskier investments. Peru proposes a new tax to slow down currency’s gains.

 

The yen strengthened against the euro to a 9-month high as President Barack Obama presents new proposals limiting the rights of banking institutions to participate in hedge funds. As he spoke investors began fleeing from riskier higher yielding assets and sought safe haven.

The US stock market fell across the board in response to the proposals also. If the proposals are put in place, the reach of the US government would be greatly extended.  Financial institutions could be limited in size and scope. The goal is to reduce the chances of experiencing another recession prompted by bank risk taking, but limiting the US banks could have a large impact on the global economy in the future.

The yen strengthened to 126.86 yen per euro and to 89.84 yen per US dollar.

The yen is currently a refuge from stock markets falling globally. The yen has gained on a weekly basis for 2 weeks and was boosted this week by Obama’s proposals.

The euro fell once again when paired with the US dollar and reached US$1.4084. Emma Lawson with Morgan Stanley in London issued a report that summed up the situation succinctly in regards to the euro. “It boils down to credibility: The credibility of the Greek government in meeting their targets, the credibility of the EU (European Union) institutions to deal with non-compliant states and the credibility of the euro itself.”

China raised its interest rates this week in order to slow down rapid economic growth. The recovery in China has been heating up rapidly with GDP growth currently approaching 11 percent.

The increase in the rates put the skids on the Australian dollar. The Aussie fell to 90.25 US cents and to 81.09 yen.  The Australian dollar will most likely head for an overall weekly decline against the yen as China implements a tighter monetary policy.

The Canadian dollar fell against the US dollar as oil prices decline. Crude oil has fallen to $75.91 a barrel for February delivery. The loonie reached C$1.0517 against the US dollar. Also impacting the Canadian dollar was the Obama banking proposals.

The Bank of Canada believes that economic growth will slow in the third quarter of this year due to a currency that has appreciated and weak US demand. The US economy continues to struggle with recovery and unemployment has risen to 10.6%.

The UK pound weakened against the euro to 87.08 pence per euro. The UK is dealing with a widening budget deficit that has risen to 15.7 billion pounds. The pound also weakened against the yen to 146.63 yen and against the US dollar to $1.6221.

Despite the budget deficit there are continued signs of an economic recovery in progress.  For example, the number of unemployment claims in the UK declined in December by 15,200. This was higher than expected.

The Mexican peso weakened to 12.9650 pesos per US dollar. The peso suffered from the flight of investors away from riskier investments into safe haven assets.

The Peru sol rose to 2.8495 sols per US dollar. The government of Peru plans on implementing a 30 percent tax on certain overseas investor profits. The new tax is intended to slow down the strengthening sol.

 

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