Yen Strengthens as Investors Watch Iran

Posted June 22, 2009

The yen strengthened against the euro and US dollar. Germany’s business confidence index rose. Mexico cut its interest rate to 4.75 percent.


The yen strengthened when paired with the euro as Iran’s political situation worsens.  The upheaval in Iran is leading to investor wariness because continued instability in Iran can have far reaching political impacts around the world.  With markets still skittish over the recession, any serious problems in economic or political situations results in investors retreating back to safe haven assets.

In fact the yen strengthened against most major global currencies including the US, Australian, and New Zealand dollars.  The yen rose to 133.87 yen per euro.  It also increased against the US dollar to 96.19 yen per dollar.  When paired with the Australian dollar the yen strengthened to 77.05 yen and to 61.60 yen per New Zealand dollar. 

Robert Marumatsu is the manager of Group Treasury Asia in Tokyo at Commerzbank AG.  He was quoted as saying to Bloomberg News, “There is growing uncertainty over what will happen in Iran that seems to be sparking risk aversion.  This would likely be supportive of the yen.”

Germany has some better economic news to report.  The German business index report shows an increase in business confidence to 85 for June to date.  In May the index was at 84.2.   This is yet another indication the global economy is finding a bottom to the recession finally.  It is especially encouraging coming from Germany because it is the European Union’s largest economy.

Mexico decided to reduce its benchmark interest rate by 50 basis points to 4.75 percent.  This represents the sixth month in a row that interest rates have been cut in an effort to stimulate the economy.  With this reduction there was also an indication that the cuts of this size would not continue as the recession begins to ease. 

Mexico is the second largest Latin American economy.  The peso strengthened against the US dollar to 13.3548 pesos per dollar.  The economy has been battered by the recession followed by the swine flu outbreak.

The UK pound advanced against the euro to 84.72 pence per euro.  This represents a .7 percent advance against the euro over the last week and the longest run of increases against the euro in over four years.  The pound strengthening was attributed to the Bank of England Governor Mervyn King stating his belief the UK recession may be easing and the GDP contraction is starting to flatten.

The UK pound also rose against the US dollar to $1.6485 pence per dollar.  Though the recession is easing it has been damaging to the UK economy leading to an expected 4.5 percent contraction this year.

Latvia’s economic troubles were leading to default on its foreign loans and loss of the fixed exchange rate.  But in new economic moves by the country’s parliament, budget cuts were approved in the amount of 500 million lati.  This opens the path for the European Commission to make the scheduled 1.2 billion euro loan to fund the remaining deficit.  This loan is a balance-of-payments plan devised during the construction of an international bailout program.

Latvia is scheduled to adopt the euro by the year 2013.  But the rules governing the size of allowable budget deficits means that Latvia must adhere to a strict budget deficit reduction plan in order to meet the European Union 3 percent limit.

The US dollar remains unpredictable at this point.  There is new housing data to be released this week which can give another snapshot of the state of the recession.  Analysts are predicting both the rise and fall of the US dollar and no one can predict with certainty the direction it will follow over the coming months.