Foreign Currencies Fall

Forex traders are watching foreign currencies fall versus the US Dollar – USD – as the European debt situation threatens to unravel. The threat of a new and steeper recession in the West, especially in the European Union is an economic threat to Asia’s export driven economies. When times are uncertain currency traders seek safe havens. For all of its faults the US dollar continues to be the world’s chief safe haven currency. Foreign currencies fall in Asia due to the collective dependence of these economies on trade with the West. Foreign currencies fall in Europe – EURO, and Great Britain – GBP, because of the seemingly endless sovereign debt dilemma that plagues these nations. Reduced tax revenues due to the ever so slow recovery from the recession have reduced the money available to pay the bill on national bonds in several nations. Most noticeable have been the so called P I I G S nations (Portugal, Ireland, Italy, Greece, and Spain). The worst situation has been in Greece where fiscal austerity measures meant to reduce national spending have not been sufficient to guarantee solvency despite loan guarantees by various lenders.

When foreign currencies fall the US dollar rises. This makes US investments more valuable but reduces the competitiveness of US industries. As foreign currencies fall many central banks in Asia are buying their own currencies on the foreign exchange markets in attempts to prop up these currencies. The efforts seem to have been largely unsuccessful as the South Korean Won – KRW, and Indian Rupee – INR, both fell nearly five percent in value. The Malaysian Ringgit – MYR dropped about three percent and in offshore trading the Chinese Yuan – CNY fell two percent against the dollar. Over the years Japan – YEN, as well as China and other Asian nations have purchased US dollars and dollar denominated investments such as US Treasuries in order to keep their currencies artificially low and their exports economically competitive. However, the concern that the global economy will get worse and that the US will never really resolve the standoff on Capitol Hill regarding the extension of the debt ceiling or that the Europeans will not come to an effective and lasting solution to the national debts of Greece and Spain specifically leads traders to fear the second dip of the recent recession.

If foreign currencies fall farther traders will take big losses so they are moving assets to the traditional safe haven, the US dollar. Although a stronger dollar is just what many nations who export to the USA want, traders are not interested in losing money on current trades and will move their assets to maintain capital and increase short term profits. As foreign currencies fall it presents a problem for companies doing business internationally. These companies will typically use currency options to hedge currency risk in such volatile markets. Companies buying goods from the USA and expecting to pay in US dollars will commonly buy calls on the USD with their own currency in order to lock in the current rate before their own currency falls farther in value.