Yen Falls as Recession Continues to Ease

Posted July 01, 2009

The Japanese yen fell against most major global currencies as the recession continues to ease. The IMF is holding its first bond sale to raise funds other than through contributions. The Polish zloty strengthens against the euro on the news the government obtained a World Bank loan.

 

The Japanese yen weakened against the euro late New York Time as investors continued to look for higher yielding assets.  The move to non-safe haven assets was bolstered by the news China’s manufacturing output expanded in June making that the fourth straight month of increase.

The move into riskier investments caused the yen to weaken against the US dollar (96.79 yen) also.  The yen reported at 136.35 yen per euro which makes a 7.1 percent loss for the year. It also weakened against the Australian dollar to 78.92 yen per dollar. 

China is not the only country reporting signs of economic recovery.  Germany is the largest economy in Europe and the government reported retail sales rose in May which makes 3 straight months of increases.  The European Central Bank will most likely keep interest rates at their current levels while continuing to closely watch the unfolding recovery. 

The signs the recession are easing are welcomed but it will still be many months before actual GDP expansion will begin in countries such as the UK, Germany, and the USA.  There are still many troubled assets (new term for the toxic assets still lingering) keeping banks from lending.  The lack of credit found on a global basis must be reversed before a full recovery can occur.

What is disturbing to many investors is the fact so many banks in the global financial industry have taken government funds and are not using them to ease credit.  The banks are just sitting on the money. 

The Chinese government has been pressuring the International Monetary Fund to move away from dependence on the US dollar as the dominant reserve currency.  For the first time, the IMF is issuing up to US$150 billion in bonds as the agency searches for new funding sources.  BRIC (Brazil, Russia, India, China) favour this approach as opposed to cash contributions. 

The IMF meets this week to develop the details of the bond offering.  The agency is considering making the bonds tradable between members but not in the open market.  This could be a first step though towards developing an increasing role of Special Drawing Rights as a reserve currency though that would take many years of transitioning away from the US dollar.

One fact is clear though.  The rest of the world does not want the US to ever be able to create a global recession again through mismanaged financial transactions. Over time there will be additional controls put into place to prevent another market collapse and one of those might be a limit on the use of the US dollar for global import/export transactions.  The greenback is currently used for settling 80% of these global transactions.

The Polish zloty strengthened against the euro to 4.3832 zloty per euro.  Poland was able to gain approval for a $4.5 billion loan from the World Bank to help the country make it through the recession.  June manufacturing reports indicated a continued contraction, but it has also slowed to the lowest rate seen in 9 months.  The loan comes on top of a US$20.6 billion Flexible Credit Line allotted to Poland by the IMF.

The Hungarian forint also increased against the euro to 270.95 forints.

The Brazil real strengthened to 1.9385 reals per US dollar.  The Latin American country is showing signs an economic recovery is in the making.  This will attract investor funds to its higher yielding assets.   In June a successful large IPO offering by an affiliate of Visa Inc. proved investor confidence in Brazil’s economy is growing.  The Visa Inc. IPO offering was the largest such offering made in the history of Brazil. 

The Brazil economy is predicted to contract .5 percent this year and to expand by 3.5 percent in 2010.

 

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