US Economy Recovery Strengthens Dollar

Posted September 20, 2009

The US dollar increased against the UK pound as the US economy moves into recovery. The Brazil real rose against the US dollar as investors pour money into Brazil’s stock market seeking higher returns. The Polish zloty weakened against the euro after rising 7.3 percent year-to-date.

 

The US dollar rose against the UK pound as it becomes more likely that the US government is planning to end government stimulus programs.  The speculation led to a 2-week high in the greenback against the pound late very early Monday morning London time.  With the economy left free to resume normal operations without being propped up by the stimulus funding, US investments will become more appealing as the recovery plays out.

The US dollar actually strengthened against most of the major global currencies on advance reports showing an increase in leading indicators for the fifth month straight.  Clearly the recession has hit the low point and the long slow road to recovery is underway.  The US dollar strengthened to $1.6231 when paired with the pound.

The US unemployment rate is at 9.7 percent which is the highest it has been in 25 years.  The rate is expected to climb to over 10 percent before economic recovery begins to create enough jobs to lower the numbers of jobless. The recovery is showing itself to be anemic at best. There is really nothing driving the recovery which is one of the concerns.
In addition, more US banks are expected to fail within the next two years.

The greenback also rose against the euro to $1.4691.  The Japanese yen rose against the euro to 134.43 yen. Today is a holiday in Japan which will put a damper on foreign exchange trading.  Analysts are predicting a weakening of the Japanese yen over the next months.  The Japanese central bank is expected to keep interest rates low in 2010.

The Brazil real strengthened for the third straight week.  The real rose to 1.8082 real per US dollar as investors turn to higher yielding assets. The Brazilian stock market has been rising as investors purchase equities in the belief a global recovery is now truly underway. Over $14 billion has been invested in Brazil’s equity markets this year as of July 2009. A global recovery bodes well for the Brazilian economy which is heavily dependent on commodity exports.

The Polish zloty weakened against the euro to 4.4132 zloty per euro. The zloty has already appreciated this year by 7.3 percent making it one of the strongest currencies among emerging markets.  But further increases are seen as potentially detrimental to the Polish economy.

The Czech koruna held firm at 25.154 against the euro.

The US Treasury sales are robust in the belief that the US inflation rate will remain low as the economy recovers. This rise is seen as the consequence of countries holding US dollars that need to be invested and not as a statement of faith in the US government’s monetary policies. Even China, despite its talk about reducing US holdings, added another $24.1 billion in Treasury investments in July. This means China has increased its holdings by 10 percent in 2009. As one analyst pointed out, China may not want to buy US investments at the same or higher level but really has few other options.

World currency reserves are now made up of 65 percent US dollars.

The US is expected to keep overnight lending rates at the current zero to .25 percent for the time being. The Federal Open Market Committee (FOMC) is expected to consider rates at its meeting this week.

 

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