Euro And Pound Up Against The Dollar

Friday January 16, 2009 saw the dollar fall against the euro and the pound as the American government stepped up its work to help out troubled banks and help boost the failing economy. The euro rose 1.4% to close at $1.3294 and the pound rose to $1.4742 against the dollar. The dollar also declined against the yen by 1% to 90.57 yen, but the yen also fell more than 2.2% against the euro, trading at 120.47 yen.

“Government backstops, stimulus packages and presidential inauguration optimism are helping offset the gloom emerging from the raw data,” said Ashraf Laidi, who is the chief market strategist at CMC Markets. The dollar is being viewed by investors as a safe alternative to ‘more economically sensitive assets’, namely stocks and high yielding currencies. The dollar tends to fall when investors are optimistic about the economy and are willing to take risks. The euro and the pound are traditionally high-yielding currencies and they have been under pressure thanks to the turmoil in the banking sector undermining investor’s risk appetite. Friday saw the sentiment change as the government expanded their efforts to help the struggling banks.

“Risk appetite remains propped by another U.S. government back stop to a U.S. bank, this time to Bank of America’s efforts in absorbing Merrill Lynch,” Laidi said. The American Treasury Department is extending $0 billion more to Bank of America so that the banking chain can absorb any losses that are associated with the purchase of ailing brokerage firm Merrill Lynch. An additional $118 billion in assets has been guaranteed as well.

The second half of the $700 billion Troubled Asset Relief Program has also been released to the incoming Obama government in an effort to help boost the economy. House Democrats released an expansive economy recovery plan in an attempt to stem what has become the ‘worst economic crisis in decades’. The plan, known as the American Recovery and Reinvestment bill, is calling for $275 billion in tax cuts and $550 billion in spending and aid to states. This advance came with a mixed bag of economic reports.

The Consumer Price Index which measures inflation has declined to a seasonally adjusted 0.7% in December, showing the third consecutive monthly drop that was led by a sharp drop in energy prices. The CPI edged up 0.1% in 2008, which is the weakest annual increase since 1954. When food and energy costs are removed to the index, it shows a relatively unchanged number.