US Dollar Weakens Against Pound and Euro as US GDP Contracts

Posted April 30, 2009

The US dollar weakened against the pound and euro as the stock market rose even in the face of signs the recession is easing but not ending. The Mexican peso dropped as the country is hard hit by the swine flu.

 

The US Commerce Department reported bad news when saying the Gross Domestic Product (GDP) contracted by 6.1 percent for the first quarter of 2009.  This is much larger than the optimistic 4.7 percent investors expected to hear.  In addition there were reports of inventory declines and housing drops, yet the Federal Reserve is claiming the recession pace has slowed.

Despite the bad news, the stock market went up and the US dollar weakened against most global currencies.  This was largely due to the fact the banking industry has reported its peak losses and is beginning the long process of stabilization.  This is true for many global banks including those in the UK, Germany and Switzerland.

The US dollar weakened against the UK pound to $1.4740 US dollars. It also weakened against the euro to $1.3266 US dollars.  The Federal Reserve met yesterday and decided to not make any changes to the US monetary policy.  The US dollar fell against the Polish zloty also to 3.3083 zlotys per US dollar; the Australian dollar to 72.47 US cents; and the New Zealand dollar to 57.21 US cents. 

The US dollar did rise against the yen though to 97.49 yen per dollar.  The fall in the yen is due to less investor aversion to risk.

Mexico‚Äôs peso has taken a beating this week as it went up and down with each piece of news about the spread of the swine flu.  After rising when it appeared the government was taking decisive containment action, the peso weakened to 13.8736 peso per US dollar.  The peso has fallen 3.9 percent overall against the dollar this week.

The flu is taking a terrible toll on the Mexican economy.  The tourism and hospitality industry has come to a virtual screeching halt.  Even restaurants are currently forbidden to serve food in-house and customers must take their food home.  Cruise ships are not stopping at the ports and tourist travel is being discouraged.  This is not good news for an economy trying to also battle the impact of the recession.

The Canadian dollar strengthened as investors begin to hope the recession is seeking bottom.  The loonie rose to C$1.1947 when paired with the US dollar.  The event that can have the biggest impact on the Canadian dollar today is news the US automaker Chrysler is going to declare bankruptcy.  There will be a news conference at noon, New York time, to announce the status of Chrysler and bankruptcy is certainly still considered a viable option.

The Norwegian krone strengthened against the euro and US dollar as investors sought higher yielding assets yesterday.  The krone rose to 8.7075 krone per euro and to 6.5642 krone per US dollar.  Norway has a 3.1 percent unemployment rate which is quite low compared to many other countries including the US.  The Norges Bank is expected to review monetary policy the first week of May.  The Swedish krona also rose against the US dollar to 8.0424 krona per dollar.

Emerging and Asian currencies fared well against the US dollar yesterday.  The South African rand rose again to 8.5195 rand per US dollar.  The Korean won strengthened to 1335.70 won per US dollar.  These increases are another sign investors are seeking more return on their investments and are willing to accept more risk.

The US Congress passed a $3 trillion budget yesterday.  This begins the new level of increased government deficit spending.  The long-term impact of this spending is being hotly debated, but the US is getting ready to begin a new three-pronged program of spending on energy, health care, and education.

The US dollar is expected to stay strong, though any validated signs the government is unable to raise enough funds to pay its own debt will put pressure on the dollar.  Time will certainly tell this story.

 

Comment