Who You Calling Ugly?

Posted January 15, 2009

The Japanese yen became the strongest currency as the US December retail sales reports show a steep dive downward. The euro continues to weaken in expectation of the European Central Bank interest rate cut by .5%.


The US dollar weakened against the yen to 88.61 yen per dollar on Wednesday, 14/January/2009.  The reason for the decline was primarily related to the retail sales reports which were ugly.  In the month of December 2008, sales declined by a whopping 2.7%.  This is supposed to be the month when stores get themselves into a profit position by the end of the year.

The ugly sales number is twice what Wall Street expected and that caused the Dow Jones Industrial Average to return to a volatile condition.  The DJIA saw a 248.42 point change to reach 8,200.14 or a 2.94% decline in a single day.  The UK FTSE 100 results were even uglier with a 4.97% decline or a 218.51 point loss to 4,180.64.  The days of triple digit swings seem to have returned which means investors will be racing once again to move money between government securities, stocks and currency markets.

Around the world, the economic activity continues to fall and the early 2009 investor optimism is gone.  The euro weakened against the yen to 116.58 yen per euro.  This number represented a six week low for the euro against the yen.  The euro fell against the yen primarily due to investor expectations that the European Central Bank will cut the benchmark interest rate by at least .5%.  In addition, the euro zone economic condition continues to deteriorate similarly to the US. 

The yen advanced against most of the major global currencies as it become the haven currency.  The yen reached 89.44 yen per dollar and the euro traded at 118.61 yen per euro.  The yen also advanced 9% against the New Zealand dollar.  It is the retail sales reports which are causing the dollar to slide.  The market is looking for risk aversion again and the yen is only ugly while the other currencies are uglier.

There‚Äôs nothing like having only bad choices to cause investor confidence to retreat again. 

In other parts of the world, Russia is still in a feud with the Ukraine and the gas pipeline remains shut down.  The Russian Bank of Rossii has devalued the ruble three times in four days.  The ruble weakened significantly against the dollar to reach 31.9066 rubles per dollar.  This is the lowest the ruble has seen when paired with the dollar since January 2003.  The ruble is managed against a basket of currencies made up of US dollars and euros.

The Russian ruble actually began falling against the dollar/euro basket when it invaded Georgia in August 2008.  Since then it has fallen 24% against the currency basket.  Analysts predict further declines in the ruble versus the basket as the pipeline dispute is extended.

The Mexican peso is also weakening against the US dollar as a result of the retail sales reports.  The decline in sales is a predicator to further declines in Mexican imports.  The peso weakened to 14.0972 pesos per US dollar yesterday.  The Banco de Mexico is attempting to influence the value of the peso by purchasing at auction pesos worth US$400 million. 

One of the looming concerns which is going to have a significant impact on currency rates in 2009 is the financing of the massive US government debt.  Actually, countries like Great Britain and others that issued enormous government stimulus packages to create market liquidity must now think about how they will be able to raise the funds to cover the debt.  Currently about 60% of the US debt is financed by overseas investors such as China.