US Dollar Weakens Even More

Posted October 04, 2009

The US dollar continued to weaken on the news unemployment is continuing to rise. The G-7 met and encouraged China to develop a stronger yuan. The Canadian dollar rose as oil and other commodity prices rose. The Australian dollar climbed on speculation interest rates might be raised.


The US dollar is falling and US Treasury Secretary Timothy Geithner is once again on the defensive.  He told the G-7 group at their meeting last week that the US will do what is necessary to maintain global confidence in the US dollar.  He was quoted as saying, “It is very important to the United States that we continue to have a strong dollar.  We recognize that the dollar’s important role in the system conveys special burdens and responsibilities on us and we are going to do everything necessary to make sure we sustain confidence.”

The G-7 members responded by encouraging China to continue to strengthen the  yuan to correct a portion of the trade imbalances.  The US dollar is the primary global trade reserve currency and its 14% drop since March against the 6 other currencies represented by the G-7 has hurt the pace of recovery.

The dollar continued to weaken over the weekend into Monday. The Australian dollar, on the other hand, rose as analysts speculated the central bank might raise the Australian benchmark interest rate at its policy meeting this week. If the interest rate is raised it will be the first country to do so since global rates were lowered to battle the recession.

The Australian dollar strengthened to 87.36 US cents. The euro also strengthened to $1.4634 against the euro. The US dollar remained steady against the yen at 89.85 yen.

The US dollar is being hurt by the poor economic news that seems to continue.  It is becoming clearer this might be a jobless recovery in the US which means the rate of recovery will be slowed considerably.  US businesses are reluctant to add workers at this point despite signs of increasing economic activity.  There has even been the first suggestions a second recession is possible though that would only happen if another catastrophic event occurred such as a second collapse of the financial industry.

Interest rates in the US are expected to be kept at their current levels as long as the economy is deteriorating. This means the US dollar will continue to weaken as investors invest in higher yielding assets. The US job loss numbers for September were a very disappointing 263,000 jobs when the number had been expected to come in at 175,000.

The Canadian currency rose as commodity prices increased.  The loonie strengthened to C$1.0797 against the US dollar.  This means one Canadian dollar would purchase 92.62 US cents. The prices for a barrel of oil for November delivery increased to $71.39. Gold is currently over $1,000 an ounce. Numbers released this week are expected to show Canada added jobs in September.  Hopefully the nation will not be surprised by negative reports like those the US experienced last week.

The UK is experiencing uneven indications that economic recovery is underway. The pound has weakened against the US dollar for the third week as of last week. The pound ended the weekend at $1.5893.  It rose against the euro to 91.82 pence.

Japan’s Finance Minister Hirohisa Fujii made it clear that the country is not ready to end its current fiscal and monetary policies.  The recovery is much too fragile at this point.  For example, Japan’s unemployment numbers continue to rise much like in the US. Also, declining exports and the variability in the currency and equity markets is eroding profits.

Until there are stronger signs the financial industry and economic indicators are stronger, the only plan right now for most countries is to continue to play wait-and-see.  But there is certainly a lot of talk going on about possible currency market intervention in countries with falling currency values.