US Dollar Weakens Yet Again

Posted July 26, 2009

The US dollar weakened against the yen and euro as the recession continues to ease. The G-20 is expected to address placing limits on certain financial activities. Chinese and US officials meet this week to discuss a full agenda of topics including currency reserve account imbalances.


The US dollar has been sinking as signs the recession is easing are growing stronger.  The US government will be reporting that US home sales are rising and that is driving investors to higher yielding assets such as those in Australia and New Zealand where interest rates are higher than the US rate of zero.   Home sales rose 2.9 percent in June even though home prices continued to fall.

The greenback hit a seven week low against the euro this past weekend when it reached $1.4291.  The dollar weakened against the yen to 94.72 yen per euro.  The yen strengthened against the euro also by Sunday evening to 134.57 yen per euro.

As the global economy stabilizes the long term predictions the US dollar would weaken are already coming true.  The euro and the Australian dollar are expected to continue to strengthen against the US dollar.  The Australian dollar reached 65.51 US cents.

US Federal Reserve Chairman Ben Bernanke said last Friday he expected US unemployment to remain high for a long time but hoped the GDP would begin to expand in 2010.  That is a much grimmer prediction than hoped for by investors and an indication the recent rise in the stock markets are adjustments that may not hold.

The US economy contracted again the second quarter of 2009 which makes the fourth consecutive quarter of contraction.  This has not happened since 1947.

In another sign the recession is abating quickly, Gordon Brown, the UK Prime Minister is pushing the G-20 to address the issue of re-establishing balance in the global economy.  His report addresses the serious imbalances that currently exist in trade reserve accounts. 

For example, the $2 trillion reserve balance held by China has raised concerns about what China plans to do with its excess US dollars.  The flat lining of the Chinese trade surplus is correcting some of the imbalance, but Brown believes the G-20 needs a specific monetary and fiscal policy to address the issue.

He also believes the G-20 needs a plan for expanding the stimulus programs while promoting normal economic growth.  He said, “We are at a point where banks have been stabilized, but we don’t yet have a strategy for a return to growth.”   The group of countries called the G-20 has indicated some agreement on issues related to limiting hedge funds and bank risk-taking, but has not agreed on the need for additional government stimulus funding.

China and the United States are meeting on Monday and Tuesday to discuss a number of topics.  At the top of the list, of course, are monetary stimulus polices.  The officials will also address the weakening condition of the US dollar.  Other topics on the agenda included in the Strategic and Economic Dialogue are reducing China’s current account balance; greenhouse gases; conflict areas where China is involved economically such as the Sudan and Zimbabwe; nuclear arms threats coming from Iran and North Korea; and human rights.

This is a long agenda and it must be assumed some of the topics, such as human rights, will not get a lot of attention at this time.

The currency markets were quiet over the weekend with investors waiting to see what the US reports this week concerning US economic data.  Inflation is expected to remain low through at least 2010 and maybe 2011.  Until such time as the economy shows signs of true expansion, the US benchmark interest rate will be kept at or near zero.