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US Dollar, Japanese Yen Hold Strong as AIG Losses, Bailout Add to Financial Market Concerns

Monday, 02 March 2009 20:42:11 GMT  |  Terri Belkas, Currency Strategist

The US dollar and Japanese yen gained as global stock markets fell sharply on news that European Union leaders voted down a request from Hungary for 180 billion euros in aid for the banking systems of Central and Eastern Europe. Risk appetite was damaged further when AIG reported a fourth quarter loss of $61.7 billion, which encouraged the US government to offer a package of equity, new credit and lower interest rates on existing loans in order to prop up the company as they provide systemic risk for the markets.

In economic news, personal income unexpectedly rose 0.4 percent in January following a 0.2 percent decline in December, but this was not because of improved wage growth. Instead, the increase was due primarily to a 3.5 percent boost to "transfer payments", which includes retirement, disability, and unemployment insurance benefits. Meanwhile, personal spending surprisingly jumped 0.6 percent during the same period, though part of this was the result of an increase in prices from the month prior, as retailers implemented heavy discounts during the holiday shopping season. Overall, with credit conditions remaining tight and unemployment surging, the increase in spending doesn't necessarily reflect a recovery in consumer trends. The release of ISM manufacturing also showed an unforeseen rise to 35.8 in February from 35.6, but ultimately, a closer look at the report indicates broadly weak prospects for the sector. Indeed, despite the increase, this was the thirteenth straight month that the index held below 50, which signals a contraction in business activity. Furthermore, the individual components of the index showed that prices paid remain historically low at 29.0, new orders slipped to 33.1, and employment tumbled to 26.1, the lowest since record-keeping began in 1948.

Looking ahead to Tuesday, the National Association of Realtors (NAR) is expected to announce that pending home sales fell 3.5 percent in January following a 6.3 percent increase in December. This would be in line with other measures of performance in the US housing sector for the start of 2009, as the NAR's existing home sales and the Commerce Department's new home sales figures have all indicated that demand is still falling. While this isn't typically a very market-moving report, results that deviate far from expectations have the potential to shake up risk trends for at least a short time.

Related Articles: US Dollar Weekly Trading Forecast, Is The Japanese Yen Losing Its Top Safe Haven Status? 


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