Currency Update 1st March 2010

Here is this weeks update from currency expert Keith Spitalnick.

Those hoping 2010 would signal a return to global growth have been in for a rude awakening. We are still in the first quarter of the year and the currency markets are clearly worried by what they see. The US$ has been the winning currency so far this year appreciating nearly 10 % against a basket of currencies. Despite the fact that the US economy is still on extremely shaky ground and President Obama has even managed to increase the US debt by at least a trillion dollars since coming to office, the US dollar has rebounded as the rest of the world fret about problems in the Euro Zone and the increasing debt burden the UK has to service.

2010 was always going to present problems to the 16 members of the euro zone as the European central bank(ECB) signalled in late 2009 that they would no longer be able to borrow unlimited funds at historical lows rates of interest, basically free money, and they would have to balance the books in their own respective economies. Well it didn’t take a genius to realize that some of the more indebted euro zone members would struggle and the first but certainly not the last to emerge on the critical list is Greece.

Ultra low interest rates

The problem is that for the previous 10 years euro zone members had enjoyed ultra low interest rates and very little regulation from other member states .The domestic populations have been supercharged with debt and now they cannot afford to repay it. Now here’s where the European dream starts to fall apart, as other member states are reluctant to bail out each other as the political pressure mounts from their own populations who cannot see why their taxes have to go to pay other nations’ debts. Therefore the only choice Greece has is to bring in austerity measures that so far have resulted in violent protests on the streets of Athens. Greece will not be the last country to go through this struggle but while it goes on the Euro will continue to fall especially against the US$ and Japanese yen.

The UK has so far managed to convince the markets that its debt burden is manageable but time could be running out and here’s why. Between 1997 -2007 the UK borrowed £30 billion a year. In 2009 they borrowed £150 billion, 2010 was £200 billion and for the years 2011 out to 2015 £150 billion per year. Now even the most basic maths student can see that if the currency markets lose faith in the UK’s ability to repay this debt then the pound will fall. Even more worrying is the UK will have a fiercely contested election in 2010 something that could add fuel to the fire and see even more pressure put on the pound.

For the coming months

If the UK can manage both its debt and the election then perhaps the pound could enjoy a decent second half to 2010, however I would add a word of caution… it seems highly unlikely this will happen.

The overriding problem the global economy faces is the stimulus that was pumped into every economy in 2009 has been withdrawn. Yes, interest rates will stay ultra low but taxes will go up and public services will be cut. You can expect ongoing strikes and disputes as the blame continues to be passed round and round. Currency markets will not stand for politicians bluff and posture, they will punish them severely. The quote that seems to sum up the atmosphere is “keep an eye on risk or it will set its eye on you”.

You have been warned!

Kind Regards,

Keith Spitalnick

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