US Dollar Falls as Recession Loses Steam

Posted May 04, 2009

The US dollar is weakening against most global currencies as the recession seems to be losing steam. The South African rand and the Brazil real were two of the strongest performing currencies due to rising commodity prices. Markets are remaining cautious until the US government stress tests, completed on major US banks, are reported later in the week.


The US dollar fell to its lowest level in a month when paired with the euro.  The stock market rose and the dollar fell in normal trading.  The primary reason for the greenback weakening is the fact the US economy contraction is believed to have slowed.  The official report is not out yet, but that is the expectation.

The dollar fell to $1.3408 against the euro.  The US dollar also fell against the Japanese yen to 98.78 yen.  Investors are simply getting very hungry for risk again and the equity rally seems to be strong.  Investors are shedding safe haven assets like the yen and greenback and buying stocks and emerging market currencies.  The Dollar Index fell to 84.067 and that represents a .6 percent decline. 

As mentioned, the US dollar fell against the euro and yen, but it also weakened against the Australian and New Zealand dollar.  The Aussie rose to 74.19 US cents and the kiwi rose to 57.67 US cents.  The Australian and New Zealand dollars are responding to rising commodity prices.

The Australian Reserve Bank of Australia is expected to make an announcement this week about the benchmark interest rate.  The market is acting as if it believes the interest rate will be held at 3 percent.

Two currencies performing strongly against the US dollar are the South African rand and Brazil real. The rand strengthened to 8.2918 ran per dollar.  The Brazil real rose to 2.125 real per dollar.  The gains in both currencies can be attributed to the news that US housing sales increased by 3.2 percent in March making investors more comfortable with the thought of buying higher yielding and riskier currencies.

The recession and the spread of the swine flu seem to be losing steam.  The Mexico peso rose to 13.2430 pesos per US dollar as Mexico’s workers expect to return to their jobs on 6-March-2009 in most areas of the country.  In fact, the rise in the Mexico peso represents the highest increase it has seen in 6 months.  At one point the peso reached 13.30 pesos per dollar which is a 4.08 percent increase.

The US stress tests on banks are due to be reported this week.  The government has been quiet about its reports and the hope is that most of the large banks will not need a lot of additional capital raised.  That would indicate an ability to make it through the recession without more government aid.  In fact, global giant Banks of America and AIG have indicated informally that they will not need to raise additional capital.   But there are also predictions that up to 15 of the 19 banks may need to raise capital which would mean the US government will take greater ownership.

The Chile peso strengthened significantly against the US dollar on Monday, 4-May-2007, as hopes surged in the belief the recession is ending.  The peso rose to 572.70 pesos per US dollar which is a 1.54 percent increase.  The Chile peso has gained 12 percent against the US dollar this year.

In Europe, including the UK, some markets were closed for a holiday.  The economic data for the Eurozone shows the recession is finding bottom there in a manner similar to the US.  The Purchasing Managers’ Index (PMI) is still contracting in Europe but not as much as it was.  In China, the PMI shows an increase to 50.1 in April.  An index above 50 is an indication of an economy in expansion.

The euro did not change much against the US dollar despite the good news.  It was at $1.3280 against the US dollar late Monday.  The euro did strengthen against the pound though to £.8922 sterling per euro.

The European Central Bank will probably reduce the benchmark interest rate one more time to 1 percent at its May meeting.  For this reason, investors are remaining cautious.