World Bank Economic Prediction Affects Currencies

Posted June 22, 2009

The World Bank projects a 2.9 percent global economic contraction in 2009 leading to the yen and US dollar strengthening against most currencies. The Norwegian krone weakened signficantly against the yen and US dollar. Investors were cross selling the real against the peso.


The stock markets fell today as the World Bank projected a 2.9 percent global economic contraction for calendar year 2009.  As investors faced the reality the recession may be showing those “green shoots” of recovery only sporadically, their first move was into safe haven assets after absorbing the World Bank economic projection.  As a result the yen and the US dollar strengthened against most major global currencies.

The yen strengthened to 132.96 yen per euro.  The yen also strengthened against the US dollar to 95.91 yen. 

The US dollar strengthened to $1.3858 against the euro.  The yen rose against the Australian dollar. The yen strengthened to 75.2 yen against the Australian dollar, but the Aussie strengthened to 78.78 US cents when paired with the greenback.

The name of the investment game yesterday was “risk aversion”.  The World Bank assessment of the condition of the global economy was not taken lightly by investors trying to properly assess the condition of the recession and the chances for recovery in the near future.  Some analysts have been cautioning that the equity markets were rising too soon given the economic data showing continued struggles by global economies.  The sharp drop in the stock markets and the fleeing to the US dollar and yen are viewed as adjustments that were anticipated by many economists.

The moves to risk aversion are also related to the political situation in Iran which is creating a sense of global uncertainty.

The Norwegian krone saw significant weakening against the yen and US dollar also.  The yen strengthened against the krone to 14.65 yen per krone.  The krone fell to 6.5489 krone per US dollar.  The krone fell the most against the yen and US dollar among global currencies.

Mexico’s peso weakened against the dollar to 13.3438 pesos per US dollar.  It strengthened against the Brazil real to 6.5653 pesos. There are apparently some investors selling the real against the peso in cross sales.

The US Federal Reserve meets on Wednesday of this week and the expectation is that the benchmark interest rate will be left unchanged.  It is currently at zero to .25 percent.  In Australia the interest rate is still at 3 percent in comparison to the zero rate in the US.

The International Monetary Fund (IMF) commented that the US must increase its net imports before a full and lasting recovery will occur.  This will require an upward movement in the US dollar. If the Federal Reserve maintains the zero benchmark, it will also mean the US has every intention of continuing a loose monetary policy.

The US dollar strengthened against the Dollar Index to 80.75.

Canada’s dollar weakened to 86.68 US cents yesterday.  The loonie fell as the World Bank published its opinion concerning the deepness of the recession this year.  The projection of a continued contraction through this year will impact Canada’s ability to increase its exports to more normal levels.  In addition, commodity and oil prices have been dropping.

Brazil’s real weakened to 2.0255 against the US dollar as the Brazil central bank plans to cut its interest rate again in July.  Though it is not a certain action until the bank meets in July, a survey of economists found the majority believe another rate reduction is coming.

The UK pound fell against the Japanese yen to 156.84 yen.  It also weakened against the US dollar to $1.6345.  Most of the downward movement was due to investors seeking the safety of the yen over the pound.  The UK economy is actually showing some signs of improving though the recession is still only easing.  The economy has not begun to expand and might not until 2010.