Yen and Pound Weaken as Economic Recovery Begins

Posted July 10, 2009

The UK pound weakened after the central bank decided against expanding the asset-purchase program. The yen weakened also as Germany and China report data indicating a global recovery may be in the early stages. The World Bank put the US on notice that the dollar will remain the primary trade currency only if it maintains fiscal and monetary stability over time.


The UK central bank took everyone by surprise and did not expand its quantitative easing program.  This was an unexpected move because analysts and economists had predicted such a move.  Even the British Chambers of Commerce had recommended the increased asset purchases in the hopes it would prevent the recession from deepening.

The pound had been weakening due to selling pressure over the last week due to the expectation of increasing government debt.  When the central bank made it clear that it would not be petitioning the government for more funds, the UK pound began to recover.  The UK interest rate was held steady also

Yesterday the pound strengthened by 1.7 percent against the US dollar to $1.6346.  It also rose against the yen to 151.97 yen and the euro to £0.8583.

The yen had risen in the prior session and reached what was called an unsustainable overvalued level.   The Japanese government intervened verbally to slow or reverse the upward movement by calling the recent yen rise as “excessive currency movement”. 

The yen weakened to 92.97 yen per US dollar and to 130.43 yen per euro during the day.   It also weakened against the Australian dollar to 72.81 yen and against the New Zealand dollar to 58.50 yen.

Investors also shed the yen on the news there was a 48 percent increase in Chinese car sales in June.   In addition, Germany reported higher May trade data.  Both pieces of news led investors to gain some confidence in a possible economic recovery.

The Group of Eight summit continued yesterday.  On the issue of a new world trade currency US White House Press Secretary Robert Gibbs said, “Despite whatever talk you might have heard, I don’t see that there is movement away from the notion of the dollar being that currency.” 

Backing up Gibbs statement was an independent statement by World Bank President Robert Zoellick.  He said that the US dollar will remain the main reserve currency, but he also added a mild warning.  He said the US must maintain good fiscal and monetary policies and not take the greenback’s status for granted.  In other words, there are no guarantees the status quo will be maintained in the event the US is not able to manage its debt and regulate the financial industry to prevent another great recession. 

The major issue discussed by the G-8 was climate change and greenhouse gas emissions.  The question right now is what standards for emission reductions are reasonable for industrialized countries versus emerging markets.  The US Congress is currently considering legislation related to this issue.  If it passes there will be increasing pressure placed on China, Brazil, and India to follow suit.

Canada’s dollar rose after hitting a 7-week low.  This was the first increase in 3 days with the Canadian dollar buying 86.05 US cents.  The dollar rose as crude oil and commodity prices increased.  Crude oil for August delivery rose to $61.62 per barrel before ending the day at $60.47 on the New York Mercantile Exchange. 

The Canadian economy is expected to contract by 2.3 percent in 2009 with modest growth forecast in 2010.

South Africa’s rand increased to 8.1170 rand per US dollar on the belief the central bank will keep the benchmark interest rate at 7.5 percent.  The 7,000 workers constructing the 2010 Soccer World Cup stadiums are threatening to strike.  They are demanding a 13 percent wage increase and this is fuelling inflation fears. 

The rand also rose against the euro to 11.3762 rands per euro.