The US dollar traded weaker against a basket of currencies after talks to bail out the US auto sector collapsed late yesterday. The proposal, a $14 billion package to help the ailing top 3 automakers was rejected by the Senate. Their fate is now in the hands of the White House to provide emergency financing. Stock markets around the world all fell more than 3% after the news. To make matters worse, US retail sales fell for the 5th straight month. Market participants are citing that the economy is in a ‘deflationary’ environment, an economic term that means a persistent decrease in prices of goods and services. Investors are pricing in a 25-50 basis point cut December 16th.
The euro strengthened to 8 week highs against the US dollar after the US Senate failed to pass a multi billion dollar auto industry bailout package. In economic news, Euro zone industrial output fell to15 year lows, a sign that the recession is worsening the last quarter of 2008. The data reinforces the need for the ECB to deliver further interest rate cuts despite their recent comments of another cut as being unlikely.
The British pound weakened against the dollar and continues to trade at record lows against a basket of currencies. The BOE has reduced rates 3 full percentage points since October and investors expect it to continue.
The Japanese yen rose to a 13 ½ year high against the dollar on the heels of the US Senate failing to agree on a bail out for the US automotive industry. Risk aversion is the theme of the yen strength as investors flock to safety. Japanese banks have faired better than the American and European banks amidst the financial crisis. In other news, the Japanese government expanded a fiscal stimulus plan that included monies for bank rescues to $131 billion.
The Canadian dollar fell against the greenback for the first time in 3 days after the US Senate blocked the auto maker rescue plan. Canada’s finance minister commented on the importance of the auto industry to the economy as many parts and assembly plants are located in Canada. In economic news, Q3 capacity utilization fell to the lowest rate on record.
Both the Australian dollar and the New Zealand dollar fell against the greenback after the failure of a US auto maker bailout plan. Investors pared back their risk appetite as commodity prices fell in the natural resource rich region. Both countries are expected to be in recession until next year as the global economic slowdown deepens.
The Mexican peso weakened against the US dollar after US Senate denied funding the $15 billion auto industry bailout package.
