Where’s the US Dollar Headed?

Posted October 26, 2009

The US dollar reached a 14-month low against the euro and fell against most other major global currencies. The South Korean won rose against the dollar on the news the country’s economic growth is heating up. China has begun to focus on controlling inflation risks as the GDP grows at an 8.9 percent rate. The Romanian leu rose against the euro after the government addressed the currency’s recent decline due to political instability.

 

Inquiring minds want to know where the US dollar is headed over the next year and whether there is a real chance it could cease to be the primary global trade currency. The question is being considered daily and the same answer continues to come up. There is really no substitute for the US dollar right now, but that could change as policy makers around the globe continue to form new monetary and trade alliances.

China is particularly interested in developing new trade agreements and has several in place including BRIC. It is estimated it could be 10 to 15 years before the yuan, or any other currency, could replace a significant portion of the dollar reserves for trade settlements. But China has proven to be a patient country that is getting impatient with the burgeoning US debt and low interest rates.

China experienced a GDP growth of 8.9 percent in the third quarter of 2009. The State Council has shifted its focus and is now addressing the inflations risks looming for 2010. China is expected to raise its benchmark interest rates next year which could increase the pace of foreign investments. This might lead to a policy of yuan appreciation to stem rising import prices.

Currently one US dollar trades at 6.8298 yuan. The yuan strengthened against the dollar over the weekend when a Chinese policy report indicated that Beijing should increase the amount of euro and yen in its reserve account.

The US dollar fell to a 14-month low when paired with the euro. A report to be issued is expected to show improving consumer and business confidence in the US and France.  The Chinese report, the improving global economy, and the continued low US interest rates is leading to a sell-off of the US dollar.

The US dollar fell to $1.5063 against the euro at one point. It also weakened against the yen to 91.75 yen. The yen rose in response to the report issued by the People’s Bank of China indicating China should increase its holdings of the yen and euro.

The South Korean economy is doing well and reported a growth rate not seen in seven years for the third quarter of 2009. The GDP grew at 2.9 percent. The won rose to 1,178.90 against the US dollar.

The Australian dollar recovered some of its losses as a result of the Chinese report because the China reserve account will most likely also increase Aussie holdings. The Australian dollar rose to 92.41 US cents.

The UK pound broke a support level of $1.6300. Sterling fell to $1.6251 against the US dollar at one point. Last Friday sterling weakened 1.9 percent. The UK economy continues to report a bumpy recovery that will last well into 2010.

The Romanian leu is at 4.29 leu per euro. Romania has been going through political upheaval with the centrist minority government losing power. The governmental instability has put downward pressure on the leu and is threatening the ability of the government to manage the terms of a 20 billion euro IMF program. The IMF has made it clear that Romania needs a stable government in place soon.

 

 

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