US Currency Continues to Weaken as US Debt Increases

Posted June 14, 2009

The US dollar continues to weaken as US debt rises. The UK pound rose against the euro to a six month high. The Group of 8 nations met in Italy last week and agreed there are definite signs the recession is easing.


The US dollar is under downward pressure right now for many reasons.  One of the primary reasons is that the easing of the recession is making investors move into higher yielding assets.  But another reason is the growing concern over the massive US debt which is now over $1 trillion and expected to double quickly. 

China began a chorus of concern about the safety of its investment in US Treasuries and has begun to take specific actions to reduce its US investment.  For a long while China was alone but has now been joined by Brazil and Russia.  All three countries are moving funds out of US Treasuries and into bonds backed by multiple currencies.

The International Monetary Fund bonds that Brazil, China, and Russia are planning on buying are backed by a basket of currencies made up of the US dollar, the euro, the yen, and the pound.  The denomination of this currency basket is called Special Drawing Rights and the bonds will pay investors with yields close to those they received in US Treasuries.

The US dollar experienced a weekly decline against the euro and yen last week for the third week out of the last four.  The dollar weakened to $1.4016 dollars per euro and to 98.43 yen per dollar.  The dollar also dropped against the UK pound to $1.6443.

The record US debt and the growing budget deficit is causing the US dollar to erode as was predicted when the TARP and stimulus funding programs were put into place.  The UK pound is growing stronger as housing prices showed signs of increasing for the first time in many months.  The UK pound strengthened against the euro to 85.20 pence.

The UK pound has reached its highest level against the euro since 2-December-2008.  At £0.8531 when paired with the euro, sterling has experienced a 15 percent increase.  Some of the pound’s strength is due to signs of economic recovery, but some of it is due to growing concerns over he European Zone banking system. 

Whereas the UK has been very public about the condition of its banks, the largerst Euro-Zone member, Germany, has not.  The Euro-Zone countries have made a number of loans to emerging markets in the Baltic States and eastern Europe.  Some of those markets, such as Latvia, may be unable to pay their debts.  In additon, the banks continue to hold a number of toxic assets.

The UK Finance Minister, Alistair Darling, said that the Euro-Zone will have to deal with these issues truthfully before full recovery can begin.

Crude oil prices dropped last week to $70.80 a barrel for July futures which is a significant drop.  This had an immediate impact on the Canadian dollar which fell against all of the major global currencies.  The loonie weakened to 89.39 US cents.

The Group of 8 nations met in Italy on Friday and they agreed the recession is easing but that recovery will not be swift.  In fact there may be setbacks along the way to full recovery, but even German Finance Minister Peer Steinbrueck presented a positive position.  He was quoted as saying, “I am very cautious, but there are indeed indicators which show that there will be possibly a certain stabilisation.  But I share the view of the IMF completely that the date and the drive of the upswing and the sustainability are very insecure.”

One of the purposes of the G-8 meeting was to decide when and how to begin unwinding the stimulus programs the countries had implemented to prop up the financial industry.  This is where the countries finance experts were unable to come to agreement.  There are differing opinions on what indicators should be in place to signal the unwinding is needed and they also disagreed on how to test banks for financial stability. 

The G-8 group did agree to submit the question to the International Monetary Fund.