The U.S. Dollar was stronger against most major currencies last week as risk aversion continued to dominate the markets. Traders had to deal with everything from the deteriorating economy in Japan to the financial turmoil developing in Eastern Europe.
Equity markets around the world plunged to lows not seen in over six years as global traders failed to react positively to the U.S. attempt to provide aid to its struggling homeowners. U.S. financial institutions continued to feel pressure from short-sellers who were driving stock prices lower because of the threat of impending nationalization.
Throughout the week the overwhelming theme was sell equities and buy gold, treasury bonds and the U.S. Dollar. This trend is likely to continue until the central banks get on the same page and coordinate efforts to save the global economy.
Late in week George Soros even went as far as to say that the world financial system has effectively disintegrated during a short period of time. He could not even compare the current market conditions to those experienced during the Great Depression.
Obama advisor and former Fed Chairman Paul Volcker noted that industrial production in the world was deteriorating more rapidly than that of the U.S. He went on to say I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world.
Both gentlemen allude to the speed of the disintegration. This should be noted because the pace at which the central banks and the governments are responding is relatively slow. One suggestion would be to have the central banks skip their monthly scheduled meetings and to call for one big emergency meeting. The goal of this meeting would be the implementation of concrete detailed plans to fix the world economy, not a photo-op like the G-whatever meetings. Let's face it, we’re all in bed together, everyone knows what the other one is facing. Unification and coordinated of efforts is needed right now. There is no time to wait as it appears the worst is yet to come.
Next week the Euro faces the same challenges as the economic situation in the Euro Zone is expected to continue to worsen. Not only are production and services going down, but the EZ faces the threat of major credit-rating devaluations for Ireland, Spain and Portugal. More problems may surface regarding Greece and Italy.
The European Union last week suggested that it would come up with a plan to provide aid to weaker countries; at week's end however, no plan was provided. This is once again a sign that the European Union and the European Central Bank are behind the curve and seem to be more willing to be reactive than proactive.
The situation in the U.K. seems to be improving somewhat. The British Pound has stabilized and global traders are embracing the U.K. government and the Bank of England for their aggressive combination of interest rate cuts and financial stimulus to help restore stability and revive the economy.
Commodity-linked currencies such as the Australian Dollar, New Zealand Dollar and Canadian Dollar are all expected to remain under long-term pressure as long as commodity prices continue to fall. Demand is down for most commodities such as crude oil, natural gas and food products. This trend is likely to continue as the lack of available credit is curtailing sales.
There is nothing good coming out of Japan. The Yen needs to continue to break to get the world interested once again in buying Japanese exports. This should be no small task, however, as not only does the Yen have to drop, but consumers - especially in the U.S. - actually have to want to spend.
Finally, the Forex market that should be watched closely this week is the Swiss Franc. The ruling party in Switzerland is angry with the U.S. because of its aggressive stance toward tax cheats. The ruling party known as SVP is calling for a boycott of U.S. products and the possible repatriation of Swiss National Bank gold held in the U.S. Keep an eye on this market as things could get very volatile.
Please do not hesitate to contact us at 1-800-971-2440, with any questions.
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