US Dollar Weakens As Fed Keeps Interest Rates the Same

Posted November 05, 2009

The US dollar weakened against the euro and the yen after the Federal Reserve chose to keep interest rates at historic rates. The UK pound remained the same after Bank of England expanded bond buying program. The Chile peso strengthened as the US economy improves.


The US Federal Reserve chose to keep US interest rates at their historic lows of zero to .25 percent for an extended period of time. This made the US appear to be in the slowest recovery stage as other central banks adopted policies clearly intended to make changes that recognize economies that are improving. The words “extended period” coupled with signs of economic recovery led to investors taking on more risk and moving money into higher yielding assets.

The Bank of England policy members met and chose to continue its policy of asset buying but at a slower rate than was anticipated. In addition the European Central Bank is getting ready to begin exiting some of the emergency funding programs. This sent a clear signal to the global economy that normal resumption of economic activities is expected to continue.

The result of these announcements was a weakening in the US dollar fell slightly against the pound and more against the euro and yen. The US dollar fell to $1.4864 against the euro. It also fell against the yen to 90.72 yen per greenback.
The US unemployment rate continues to rise despite signs the economy is improving. The 31-October-2009 Labor Department numbers show 512,000 new claims were filed which is the lowest number reported since last January.

The UK pound remained fairly stable against the US dollar after the Bank of England announced it expansion of the quantitative easing program.  It rose slightly to US$1.6568. The Bank of England has also chosen to keep its benchmark interest rate at .5 percent. The UK is showing definite signs of economic improvement with UK manufacturing is up by 1.7 percent.

The Swedish krona rose to 6.9966 krona per US dollar. The krona rose as in response to investors increasing carry trades. The low US benchmark interest rate are causing currency investing shifts as traders look for profits.

The Mexican peso fell once again as fears grow the country’s credit rating may be downgraded. As reported a number of times the government is searching for a compromise between the political parties that will close a 2010 budget gap.  The peso weakened to 13.3328 pesos per US dollar.

Mexico’s opposition party has been objecting to the proposals of spending cuts and tax increases to close the budget deficit. There is tentative agreement on a 1 percent tax increase at this point but Mexico’s President Calderon has proposed a 2 percent increase.

Also impacting the Mexican peso is the decline in oil prices to $79.87 a barrel.

Chile’s peso strengthened to 523.65 pesos per US dollar. This is the highest level the peso has seen in over 14 months as investors move into higher yielding assets. Investors are also showing greater interest in emerging market assets.

The strengthening Chile peso is in response to growing signs of US economic recovery. Also helping the peso is the fact the government is bringing in US dollars held in a special account and were earned from copper export profits earned over a year ago. This fund is named the Economic and Social Stabilization Fund and funds are being used to plug budget deficits.
The Colombian peso weakened to 1,968.45 pesos per US dollar.  Argentina’s peso remained stable at 3.8167 pesos per dollar.