US Dollar and Yen Strengthen as Bernanke Speaks

Posted July 21, 2009

The US dollar and yen rose as US Federal Reserve Chairman Bernanke said financial markets remain stressed. The UK pound fell on reports housing prices are expected to fall again. China and the US will meet next week in a new forum to discuss economic issues.


The yen and dollar continued the rise that began late Monday.  The currencies were strengthening as investors tried to determine the possibility of CIT Group going bankrupt.  On Monday the markets were relieved to hear the financial giant had obtained $3 billion in private financing, but fears it is not enough to save the company have returned.

When investors begin to worry they turn to safe haven assets such as the US dollar and yen.  The yen strengthened against most major global currencies such as the euro (132.77 yen per euro) and the US dollar (93.57 yen per dollar).

More investor worries returned also over the condition of the UK housing market.  A survey last week of the Nationwide Building Society indicated housing prices and mortgage initiations were going to continue to rise and reports showed housing prices rose .6 percent in June. 

But a different UK group, the National Institute of Economic and Social Research, has now said the slump will continue into 2012.  This put downward pressure on sterling.

The UK pound fell to US$1.6405.  It seems the recent indications housing prices were rising were due to a low supply of homes available for sale and not to an improving economy. 

US Federal Reserve Chairman Ben Bernanke told a Congressional Committee that there are signs of stabilization but financial markets are still stressed.  Comments like that will naturally drive investors to safe haven assets while they reassess the state of the global economy. 

The US dollar strengthened to $1.4192 against the euro.  It also rose against the Australian dollar to 81.61 US cents and against the New Zealand dollar to 65.56 cents.

The strengthening of the US dollar is benefitting Brazil’s real with it reaching its highest level since last September.  The real broke through the 1.9 resistance level at one point on Tuesday.  At the close of markets New York time it was at 1.904 reais per US dollar.

The real is responding to signs of economic improvements in both the US and China.  Brazil exports a number of commodities to these two countries and commodity prices are rising.

China has been preoccupied with the factory riots in the southern section of the country, but is once again talking about concerns over its US investments.  The weakening of the US dollar could seriously impact the value of the Chinese holdings in US currency. 

China reported last week that it now had a $2.13 trillion currency reserve of which 70 percent is in US dollars. 

Assistant Finance Minister Zhu Guangyao was quoted as saying, “As an important investor in U.S. debt, we of course are concerned about the state of the U.S. economy.  We hope that U.S. economic policies will yield more effective results as soon as possible, that the U.S. government's fiscal deficit will gradually come down and that the balance sheet of the U.S. Federal Reserve will be improved.”

 A new forum has been created called the China-US Strategic and Economic Dialogue.  The purpose of the forum is to provide a venue to discuss long range issues shared by the two countries.  It is at this forum the Chinese will reiterate their concerns about the condition of the US economy and US monetary policy.

Canadian’s dollar fell against the US dollar in response to Bernanke’s comments concerning the state of the US recovery.  The loonie had risen to a six-week high when paired with the greenback, but fell to 90.33 US cents.

Bernanke told the Congressional Committee that US unemployment will remain high through next year and that will slow consumer spending.  There had been hope the recovery would be swifter than originally thought but Bernanke’s comments brought a dose of realism to the markets.

Over the next 12 months it is expected that economic signals will continue to be mixed.