Posted December 30, 2008

Investors are trading euros and turning away from US dollar and sterling. The Israel-Hamas conflict is creating uncertainty in commodity markets.


Let’s face it….the Israel-Hamas conflict is creating the most interesting news in the currency trading markets right now.  The conflict is sadly leading to terrible destruction in the Middle East once again, and one of the many financial consequences is uncertainty as to the impact this conflict will have on the world’s oil supply.

As a the Israelis and Hamas battle it out in the Gaza strip, it is not known if crude oil exports will be reduced as a result.  In the domino effect, currencies are impacted on the speculation concerning future oil shipments before anything is known with any certainty.  The US dollar weakened against the euro ($1.4075) leaving the US currency at a 2.9% advance for 2008.   Oil prices increased by US$2.32 per barrel to close yesterday at $40.02.

The Middle East unrest will continue to affect oil prices, and in some countries that is leading to currency strengthening.  For example, the Russian ruble has been steadily declining over the last couple of weeks due primarily to declining oil prices.  With the increase in crude oil prices, the ruble ($29.39) advanced against the US dollar for the first time in the last week.

The US dollar also weakened against the yen ($.01106) and the euro ($1.4075).  The primary reason for the decline against the yen was additional housing market information leading investors to believe the US recession is getting worse with no turnaround in sight yet.  The decline against the euro is due to the rising price of a barrel of crude oil.  When oil prices go up during a recession, the US dollar is expected to weaken against other global benchmark currencies.

The pound also fell against the euro making a 7-day streak of declines and reached 97.79 pence per euro.  The UK is experiencing a recession which it has not seen in 17 years.  The speculation is the Bank of England will follow the lead of the US and cut its benchmark interest rate to zero percent at some point.  There is also talk of instituting a policy of quantitative easing which is also happening in the US.  Quantitative easing floods the market with cash which naturally leads to a currency weakening.

Some analysts believe the euro and pound will reach parity soon. 

Asian currencies, on the other hand, are on the rise.  The South Korean won ($.0007), Chinese yuan ($.1460), and Thai Baht ($.0285) advanced against the US dollar. 

The equity markets can best be described with a word used by a financial analyst.  That word is “yawn”.  The Dow Jones Industrial Average closed yesterday at 8,483.93 which was 31.62 points down.  The FTSE stands at 4,372.02 or 52.67 points up and the NIKKEI is at 8,859.56 which is 112.39 points up.  Investors around the world are now waiting to see which retailers will survive a horrendously poor Christmas season in terms of sales.  It is expected there will be a number of businesses announcing they are entering bankruptcy or insolvency. 

The auto industry in the US got its boost yesterday with General Motors getting a $6 billion loan lifeline from the government.  This is seen as merely a transition loan in that President-elect Barack Obama will have to decide whether he wants to support additional bailout funds.  There are varying views as to whether there is really any hope that General Motors and Chrysler can survive in the long term.  If they do, it will be as very different companies from what is found now.

So the currency and equity markets remain quiet as the New Year gets one day closer.  It is oil prices which are the most volatile right now.