Yearning For the Yen

Posted January 25, 2009

Economists are starting to agree that an economic recovery will not begin until housing prices stop declining. Until then the global recession will continue to deepen and currency markets will remain volatile. The yen is the strongest currency right now and is seen as a safe haven investment.


The stormy winds of volatile financial markets continue to blow as housing prices around the world keep falling.  There are homeowners in the US that were given assistance with their mortgages so they could avoid foreclosure and 60% are now facing foreclosure anyway.  The rising unemployment rates coupled with declining housing prices in countries such as the US, the UK, France and many other countries are creating a tornado of distress in the global markets.

The primary currencies under watch right now are the US dollar, the yen, the pound and the euro.  Of course, it is the yen which is showing the strongest price appreciation against other major global currencies.  Investors are yearning for the yen, because it is seen as a currency in a country experiencing a milder version of the global recession. 

Credit in Japan is not as tight as credit in the US, the UK or other countries.  In addition, banks in Japan did not invest heavily in the subprime mortgage market and so have not experienced the depth of problems that banks in other countries are confronting.  The yen is seen as a safe haven investment and there is significant currency repatriating occurring as interest rates have been lowered around the world and are closer to the normal low Japanese rates.

The yen strengthened against the US dollar last week to a level not seen in over 13 years.  It also strengthened against the euro.  On Friday, the yen was at 88.54 per US dollar and 114.18 per euro.  Investors are predicting the yen will continue to strengthen through the early part of this week.

The UK pound continues to weaken against the US dollar ($1.3804) and the euro (94.02 pence).   The weakening is largely due to government reports the UK economy is continuing its contraction.  Analysts are not even mincing words anymore and are talking about just how bad conditions really are in the country.  In the UK, unemployment rates and home foreclosures increased.

The Bank of England is expected to once again reduce its benchmark interest rate to 1% in the first week of February which would represent a .5% cut.  The government is planning an accelerated purchase of private securities and additional banking support. 

The euro is under a lot of pressure due to poor economic conditions in the euro-zone.  It is consistently weakening against the US dollar and reached $1.2987 as of late yesterday.  Once again, there is talk of the euro and pound reaching parity at some point this year. 

Another big topic of the day is currency intervention.  Currency intervention refers to government actions taken to support a specific currency price.  For example, Russia is talking about ending the devaluation of the ruble.  China‚Äôs renminbi has remained stable despite economic problems through currency management.  This is leading to tensions between China and the US due to the problems the currency management creates in the import/export market between the two countries.

The currency markets remain fairly quiet right now as governments continue to seek ways to stabilize the banking system.  But the currency rates will be impacted by a slew of economic data to be released this week in the US, the UK and the Euro-Zone.  Some poor expectations are built into the current prices, but any reports that are worse than expectations will lead to further weaknesses in the sterling and euro against the US dollar, and the US dollar against the yen.