US Currency Battered Again as Credit Markets Loosen

Posted May 22, 2009

As stocks slid, the US dollar took a battering that has been expected for a long time now. The Canadian currency strengthened to a seven-month high after advancing for a fourth straight day.


The battering the US dollar is taking as the recession eases was predicted and long expected.  The dollar is dropping as credit markets improve.  The greenback weakened against almost all of the most traded global currencies.  In fact, it weakened against 15 of the 16 most traded currencies with the Mexican peso being the one exception.

The dollar weakened to 94.88 yen per dollar.  It also dropped against the euro to $1.3892 and the UK pound to $1.5883.  The dollar decline is the talk of the forex markets because it has been weakening so rapidly.  Since 3-March-2009, it has lost 9.7 percent. 

The selling pressure on the US dollar is due to a number of factors.  The credit market improvement is certainly one.  But the near or at zero interest rates are also leading to investors seeking higher yields in riskier currencies as the recession eases.  A third reason for the almost 10 percent loss in greenback value is the purchase of $300 billion in government bonds by the US Treasury to create even further reduced borrowing costs.

In other words, most analysts are advising short dollar positions.  The ability of the US government to sustain its monetary policy is causing great concern.  There has even talk about the US credit outlook being downgraded.  The US is issuing a staggering amount of debt in the amount of $3.25 trillion for the fiscal year that ends 30-September-2009.

The emerging market currencies are faring the best against the weakening US dollar.  This year alone the dollar has weakened by 16 percent against the South African rand and by 15 percent against the Brazilian real.

The Canadian dollar rose to its highest level in seven months when pared with the US dollar.  The Canadian dollar reached C$1.1389 at one point which equates to 87.80 US cents.  This represents a a fourth day of increases.

The Russian ruble has been strengthening and has increased by 15 percent this year against the US dollar.  The ruble strengthened to 31.3969 rubles per dollar yesterday, 21-May-2009.   The ruble rally is due primarily to the increase in oil prices to around $60 a barrel.  Last December oil was selling at a little over $32 a barrel.

The Bank of Japan issued a report that indicated overnight interest rates would remain at .1 percent.  The government also plans on keeping its purchase of bonds at 1.8 trillion yen.  The Bank of Japan has been working on easing its credit market and decided to accept US, German, French, and UK bonds as collateral.  In addition, the Bank also reported it expects recovery from the recession to begin some time during the second half of 2009.  The recovery will begin with an increase in Japan’s exports.

Gold has become a hedge against the weakening US dollar and that is driving its price up again.  Gold reached over $960 an ounce this morning. 

The UK received the bad news that Standard & Poor’s has lowered the credit outlook for the country from stable to negative for the first time. 

The only country to indicate at this point that it expects a recovery to start in 2009 is Japan.  Canada is also in a strong economic position though and it may start a turnaround soon if commodity prices continue to rise.  The bankruptcy of the US auto makers Chrysler and General Motors is quickly being absorbed by Canada.