US Dollar Falls as Investors Assume More Risk

Posted May 12, 2009

The recession continues to show signs of easing in the US and UK leading to a weaker US dollar and a stronger sterling. Mexico's peso fell again as the country absorbs the additional economic losses attributed to the flu outbreak. Investors continue to take on more risk.


They are calling the economic signs of economic improvement the “green shoots of recovery.”  Investors are headed for a “buoyant mood” too as they search for higher yielding assets as risk taking improves.  The latest news to cause the happiness was a US report showing the trade deficit widened by a smaller amount than expected in March.  Instead of $29 billion, the deficit is at $27.6 billion.

This has led to a weakening in the US dollar early Tuesday morning, 12-May-2009, to a level not seen in four months.  The greenback fell to a low of 82.138 against the dollar index.  The dollar also fell against sterling as the UK experiences their own buoyant mood. 

In the UK, the news that retail and home sales are improving coupled with improving industrial production data led to $1.5336 US dollars per pound.  This is the highest level the pound has risen to since 9–January-2009.

The US trade deficit news caused the Australian and New Zealand dollars to take a jump also.  The Australian dollar rose to 76.47 US cents.  The New Zealand dollar strengthened to 60.49 US cents.   Both are continuing to rise Tuesday morning. 

The Australian dollar has seen a 5.3 percent increase over the last month.  The New Zealand dollar has recovered by 2.5 percent.  Both currencies are susceptible to the price of commodities, including oil, though.  It is interesting to note that some analysts predict a fall in the price of a barrel of crude oil while others see a rise to $70 a barrel as the global recession eases.  The US push to rely less on foreign oil is sure to impact oil prices over the coming years.

Yesterday, the yen rose for a second day when paired with the euro.  The Japanese yen strengthened after the US auto maker, General Motors, indicated it will most likely have to file for bankruptcy.  The company spent $10 billion in deficit spending the first quarter of 2009 trying to salvage itself in an attempt to restructure outside the courts.  But in the end it appears that bankruptcy is inevitable.  Some investors are ready for the company to decide its fate so the markets and economy can begin to adjust to the new conditions.

The yen rose to 97.16 yen per US dollar and 131.87 yen per euro.  The euro has increased by 2.7 percent against the US dollar over the last week.  The European Central Bank is going to buy covered bonds in the amount of 60 billion euros to spur on economic recovery.  This amount is not seen as having the ability to debase the currency.  The bond purchase plan is meant to ease the availability of credit for consumers. 

The ECB is also expected to indicate it plans on keeping the interest rate at 1 percent at its next meeting in June. 

The US Federal Reserve Chairman Ben Bernanke said he was “certain” the world reserve base currency would continue to use the US dollar.  China has been talking about the need to rely less on the greenback as a base currency, but for now the foreign currency reserve accounts held by central banks will keep using the US dollar. 

The Canadian dollar lost against the US dollar yesterday as the stock market fell.  In addition, the price of a barrel of oil for June delivery also fell to $56.78.  This led to a weakening of the Canadian dollar to 85.77 US cents.   Canada’s recession is still in full swing with the prices of new homes continuing to fall with March marking six consecutive months of decline.

The Mexico peso weakened to 13.276 pesos per dollar after the S&P changed the country’s credit rating outlook to negative.  Currently the foreign debt rating is BBB+ but that could change as Mexico’s battered economy is seen in a growing budget deficit.