US Dollar Strengthens to 3-Month High Against Euro

Posted December 17, 2009

The US dollar strengthened to a 3-month high against the euro as the US economy improves. The euro fell as the debt rating for Greece was cut by S&P. The Canadian dollar fell against the US dollar as inflation becomes a factor.

 

The US dollar strengthened at one point yesterday to a 3-month high against the euro. The US economy is showing continued signs of improvement while global economic news remains mixed. It is the continuing combination of good and bad economic news that is keeping the markets somewhat volatile.

The US dollar strengthened to $1.4405 against the euro after the US Federal Reserve indicated optimism the recovery is making steady progress. During the last week the number of unemployment claims dropped to 465,000 compared to 474,000 two weeks ago.

In addition, consumer spending seems to be increasing though the holiday season is sure to be having an impact. Whether the increased spending level will hold after the holidays is unknown. Continued tight credit markets are keeping a cap on consumer spending. In addition, businesses are generally not hiring and instead are keeping their payrolls as low as possible to improve profitability.

The US Federal Reserve voted to keep interest rates at their historic lows for an extended period. There is an expectation that inflation rates will remain low for many more months. Current interest rates for the US are at zero to .25 percent and will probably remain there until June 2010.

This is the same picture found in the UK, Germany, and many other developed economies. The US dollar rose against the dollar index to 77.265.

The US dollar strength is not expected to last after the start of 2010.

The US dollar rose against the yen to 90.13 yen per dollar. The euro fell to 129.85 yen per euro.

Oil prices have climbed rapidly in the last few days. Oil is now at $72.74 per barrel of crude.

The euro saw losses after the Greece credit rating was reduced. Standard & Poor’s cut the rating by one whole level to BBB+. Before the reduction the rating stood at A-.  Prime Minister George Papandreou has pledged to cut the amount of budget deficit that is currently at 12.7 percent of GDP. There are some European Union concerns though that Greece is not sincere in its efforts to reduce spending. Ironically, Papandreou campaigned on higher spending leaving him in a difficult situation with constituents. Germany has publicly said the European Union needs to assist Greece financially.

The S&P reduction to Greece’s rating came quicker than was expected and took many analysts by surprise. The European Union has launched a campaign to convince the markets that Greece will not default on its outstanding debt.  This certainly sends a message that the European Union plans on assisting Greece though Papandreou has not asked for help yet.

Canada’s dollar fell against the US dollar despite rising oil prices. In fact, the loonie fell to a 3-week low against the greenback.  The decline was due to less demand for commodity-linked global currencies.

In addition, Canada is facing increasing inflationary pressures. In November the rate of consumer price increases stood at an annually adjusted rate of 1 percent. This means a possible interest rate increase becomes sooner rather than later.

The Canadian dollar fell to C$1.0747 at its weakest point. By the end of the Wednesday New York time the Canadian dollar was at C$1.0675 per US dollar. The rebound was due to stronger oil prices.

 

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