Market News

Excessive volatility, uncertainty and turbulence in the global financial markets continue to negatively impact economic growth. According to some analysts, the U.S. economy is heading towards recession and the Federal Reserve Bank should continue to cut interest rates further to avoid full blown recession.

On Tuesday, March 18 2008, the U.S. Dollar strengthened against major currencies after the new of better than expected quality results from two large U.S. investment banking firms, Goldman Sachs and Lehman Brothers and the 75 basis points Federal Fund interest rate cut, from 3.00 to 2.25, by the Federal Reserve Bank. These results helped to ease investors’ concerns about the liquidity crisis, as investors had speculated that Lehman Brothers is a potential victim of the liquidity crunch.

Global investors are anxiously waiting for today’s (March 18, 2008 close) results of the quarterly results of U.S. Investment Banks such as Goldman Sachs, Lehman Brothers and Morgan Stanley in order to gauge the extent of the liquidity crisis in the financial markets and also identify which other financial institutions have succumbed to the crisis...

The U.S. Dollar drops to lowest level against the Euro and the Yen as investors believe that more financial institutions will fall victim to the liquidity crisis which led to the acquisition of Bear Stearns by J.P. Morgan.

Leaders of the European Union, meeting in Brussels said on Friday, March 14, 2008 that the volatility and erratic swings in the foreign exchange rates will negatively impact economic growth. In a written communiqué, they said, “in the present circumstance, we are concerned about the excessive exchange rate moves.” According to Jean-Claude Juncker, Prime Minister of Luxemburg, this is the first time that the leaders of the European Union have issued such a communiqué on foreign exchange fluctuations. French President, Nicholas Sarkozy and British Prime Minister, Gordon Brown, also expressed their concerns about the volatility in the exchange rates.

As predicted, it was only a matter of time before the U.S. Dollar fell below the psychologically important 100 yen mark. On Monday, March 14, 2008, the U.S. Dollar dipped below 99 yen, and fell to a record low against the Euro, following the announcement that Bear Stearns is seeking an emergency cash injection from the Federal Reserve and JP Morgan Chase. This news confirmed investors’ fears that the U.S. economy is, indeed, in a recession and it is likely that more big financial firms, such as Bear Stearns, are in a similar liquidity crisis.

On March 14, 2008 the Euro surged again to a record high against the U.S. Dollar as the liquidity crisis in the financial market continues and the U.S. economy falters. During the meeting of the leaders of the European Union on March 14, 2008, much of the discussion centered on how to stabilize the foreign exchange markets. According to Romano Prodi, Italy’s Prime Minister, urgent actions are needed now because high oil prices combined with the level of the Euro, will affect economic growth in the Euro Zone.

On Thursday, March 13 2008 at 00:52 (GMT) on the Tokyo Forex market, the Euro traded at 1.5527 dollars, an all time high against the dollar. Earlier that day the U.S. dollar traded at 101.36, the lowest against the Yen in 12 years.

Late Tuesday, March 11, 2008, the U.S. Dollar surged against major currencies after news of a joint effort by central banks around the globe to inject $200 billion into the troubled financial market. The U.S. Federal Reserve Bank, together with the European Central Bank, Bank of Canada and Swiss National Bank, have pledged to provide loans to financial institutions in exchange for debt, including those backed by mortgage securities.

Comments made by Jean-Claude Trichet, the European Central Bank president, at the G10 meeting held on March 10, 2008 in Basel, Switzerland, caused a dip in the value of the Euro and other major currencies against the U.S. Dollar. According to Trichet, “excessive volatility and disorderly movements in the exchange rates are undesirable for economic growth.” While his remarks were similar to those he made last Thursday after the European Central Bank made the decision not to cut interest rates, this time, his commentary was considered stronger.

The U.S. Dollar continues to fall against major currencies as the U.S. Labor Department announced that the U.S. economy lost approximately 63,000 jobs in February 2008. This report is perceived as a good indicator of U.S. economic performance, showed that the payroll in the non-farm sector decreased for the second consecutive month.

On Friday, March 7, 2008, the U.S. Dollar recovered from all-time lows as the Federal Reserve increased liquidity in the financial system. This liquidity injection has heightened speculation that, in the short term, the Federal Reserve will not aggressively cut interest rates, even though recent reports show that activities in the U.S. service sector contracted in February of this year.

The decline in the value of the U.S. dollar continued on Thursday, March 6, after the European Central Bank decided to keep its benchmark interest rate unchanged at 4.0 percent. Furthermore, the release of grim U.S. economic reports confirmed that, while demand for products from U.S. factories fell sharply in January, the U.S. service sector shrank.

Should Japan invest some of its huge state-owned reserves, estimated at $1 trillion dollars, to revitalize its economy? According to analysts, Japan’s foreign exchange reserves are the world’s second largest, behind China.

On March 5, 2008, the U.S. Dollar rebounded slightly against major currencies as foreign exchange managers squared up positions in advance of the release of various U.S. economic data. Yesterday, the Euro was trading as high as 1.5250 USD, but this was short lived, because investors do not have a complete picture of the health of the U.S. economy and as such, cannot anticipate whether or not the fed will cut interest rates at its next meeting on March 18th. Both the anticipated data and the available corporate information would certainly determine the extent of the fed’s rate cut.