Yen Falls as Trichet Calls for Stronger US Dollar

Posted December 04, 2009

The yen weakened as the US economy continues to improve and ECB President Trichet calls for a stronger US dollar. The euro continued to strengthen. The Chinese say the weak US dollar is slowing global recovery. The Canadian dollar weakened. The Venezuela bolivar plunged as Chavez threatens to seize more banks.


The yen continued to fall against the U.S. dollar, the euro, and the New Zealand dollar. The yen has been steadily weakening this week and its weekly decline will most likely be the largest seen in four months.

The yen was at 88.21 yen per U.S. dollar.  The yen traded at 132.85 yen against the euro and at 63.74 yen per New Zealand dollar. The yen’s fall was partly due to positive U.S. job news reporting payroll cuts of 11,000 signaling the global recovery is gaining speed. Investors typically exit safe haven assets and pursue higher yields in a more stable economy.

The euro has been strengthening as the European Central Bank makes plans to begin withdrawing emergency stimulus programs.  Jean Claude-Trichet, ECB President, will withdraw emergency loan programs faster than had been anticipated. This means interest rates are likely to go up next year as monetary policies are tightened. In the most recent action the European Central Bank held interest rates at its current 1 percent for the time being. But in a policy change, the ECB will now peg the 12-month loan interest rate to the benchmark rate as opposed to maintaining a fixed 1 percent loan rate.

The euro was at 132.85 yen per euro and at US$1.5060 per euro.

An interesting comment made by Trichet concerned the U.S. dollar. He told reporters, “We have a very important stake in the dollar to be strong.” The euro has seen an 18 percent increase against the greenback this year and the stronger euro is hurting exporters. The weakening U.S. dollar has been a source of concern around the world and he is certainly not the first to comment on the greenback’s status.

China has had ongoing worries about the value of the U.S. dollar.  A too-weak dollar threatens the value of China’s $800 billion investment in U.S. debt instruments. China funds almost 60 percent of the U.S. budget deficit. Recently an official Chinese newspaper indicated that Chinese policy makers believe the weak U.S. dollar is “holding back” economic recovery in a number of countries.

China has been under pressure to let the yuan strengthen after being held at the same rate for over a year. But China believes the current value of the U.S. dollar is placing countries in a difficult position where they have to decide whether to maintain exchange rate stability against the dollar or to let currencies freely appreciate. The first option impacts inflation rates and the second option impacts exports.

The Canadian dollar weakened to C$1.0552 against the U.S. dollar after ECB President Trichet’s remarks about the need for a stronger U.S. dollar. Overall the Canadian currency is headed for a .6 percent weekly gain. Canada’s employment situation is improving and final November numbers will most likely show a gain in jobs.

Venezuela’s bolivar weakened to a 2-month low to 6.30 bolivars per U.S. dollar. The 9 percent single-day drop in the unregulated parallel market was in direct response to Hug Chavez’s threat to seize more banks. Investors quickly responded by withdrawing their money from banks and then sending the money overseas.

To date, the government has seized four banks and one brokerage firm, but there could be more to come.

The Czech currency is as 17.2534 koruny per U.S. dollar. The country is facing a growing budget deficit that could lead to higher borrowing costs and threatens the ability of the economy to recover. The deficit currently stands at 6.6 percent of the Gross Domestic Product. Tax revenues have been falling as the economy continues to contract.