Yen & US Dollar Currencies Weaken as North Korea Announces Nuclear Test

Posted May 25, 2009

The Japanese yen and the US dollar strengthened early Monday morning as North Korea announced it had tested a nuclear device. Japan kept its benchmark interest rate at .1 percent with the BOJ Governor stating the recovery will slow.


The Japanese yen and the US dollar strengthened as North Korea announced it had held a test of a nuclear device.  The strengthening was due to the urge felt by investors to run for safe haven in the financial markets.  Any event such as nuclear testing injects an element of risk and lack of confidence into the political, and thus the currency, markets.

The yen strengthened to 94.50 US dollars.  The yen also strengthened to 132.29 against the euro.  The US dollar strengthened against the euro to $1.3997 dollars per euro and against the sterling to $1.5934 dollars per British pound.

The South Korea won weakened to 1,262.50 won per dollar.  The slippage was due to the news out of North Korea.

But the dollar has been weakening in response to concerns the US could actually lose its AAA rating by Standard & Poor’s due to excessive government debt.  The debt is a concern that has largely been ignored up to this point as the USA battled the recession, but now the results of the debt accumulation in the US is becoming all too obvious.  The US Treasury plans on selling new debt this week alone for $162 billion causing interest rates on US Treasuries to rise in a matter of hours of the announcement.

To put the debt into perspective, the US government is now borrowing 50 cents of each dollar it spends.  The debt is being financed largely by foreign investors with China being one of the biggest buyers.  At one time there would never have been any concern about the US having its credit downgraded, but when the United Kingdom was recently warned it could happen to it, the picture shifted in the US.

The upcoming US Treasury debt sale will be a test of investor appetite for US assets.  If the sale fails, the US dollar will be under significant pressure once again.  As the recession eases, the US dollar will be facing sell-off as investors seek higher yielding assets.

As for the recovery from the recession, the Bank of Japan’s Governor, Masaaki Shirakawa, made it clear he believes it will be slow.  The central bank recently upgraded its economic predictions, but made it clear there are still many uncertainties remaining.  Shirakawa issued a very pointed statement the US should pay close attention to because Japan went through a severe recession in the 2000s.  During that time there were cyclical up and downturns making people believe the recession was over, but a full recovery cannot start until the causes of the recession are fixed.

Japan has no intention of making the same mistakes it made before when trying to pull out of the recession.  Over confidence can mask the need for action in the form of restructuring of the financial industry.

Japan decided to keep its benchmark interest rate at .1 percent.  The near zero interest rates in both Japan and the US are significant reasons why investors are so quick to take on the riskier, but higher yielding, gains found in emerging market currencies.

By the way, technical analysis is showing there is a declining correlation between the equity markets and the currency market.  This is another sign the recession is easing.

There was very little market activity over the weekend since it is a holiday for both the UK and the US and banks are closed on Monday.