Currencies
Even after the Fed's 50 basis point interest rate cut, the U.S. dollar continues to hold its own and rise in value against the major world currencies. Since the beginning of February when the equities markets plunge accelerated, the dollar has risen about 5.3 percent against the euro and by about 6 percent against the yen. This provides the Fed with more leeway in cutting interest rates, but on the other hand could be a drag on growth, especially in the recession plagued manufacturing sector.

The explanation for the dollar's appreciation against the yen can be found in Japan's political uncertainties and financial crisis. The Canadian and Australian dollars are generally adversely affected when the United States economy softens. However, this time, even the pound sterling has been adversely affected. And the euro remains a puzzle, with analysts fearful of making predictions because they have been wrong virtually all of the time. The bottom line is that when things fall, the dollar remains the safe haven currency to the world.

The dollar rose to a 22 month high against the yen and a three month high against the euro, as investors concerned about a global slowdown turned to U.S. Treasury securities as a safe haven. The Federal Reserve is expected to continue to reduce borrowing costs to revive the world's largest economy, and investors are betting that the problems which ail the global economy are going to be solved sooner in the United States.

The euro has suffered in recent weeks as the ECB left the benchmark rate on hold at 4.75 percent amid signs of slowing growth with persistent inflation. The central bank's stance contrasts with the U.S. Federal Reserve's 150 basis points of cuts this year. The Fed's rate is now only 25 basis points higher than the European Central Bank's 4.75 percent, which is the narrowest difference since the euro began trading in January 1999.

The yen tumbled to a 22-month low against the dollar amid speculation that Japanese and U.S. policy makers will allow the currency to weaken to boost Japan's economy. The Japanese currency slipped below 124 yen per dollar on Thursday, the lowest since May 24, 1999. The yen's declines may also have been driven by the Bank of Japan's attempt to push interest rates to near zero percent on Monday making yen deposits less appealing. Investors tend to borrow money in Japan at a rate of almost zero and invest it overseas, helping send the yen down.

The dollar's gain against the yen was underpinned by concern the Japanese government's efforts to help banks won't be enough to keep the country from slipping into recession. It has been reported that Japan's 16 biggest banks are poised to book about 4 trillion yen ($32.3 billion) in the disposal of bad loans in the fiscal year ending March 31, a 60 percent increase from the figure projected six months ago.

Investors and analysts have said that a weaker currency may hold the only hope for Japan's stagnating economy. Japan has spent trillions of yen in the past decade on public works projects, pushing its debt to record levels and raising doubts whether such spending is sustainable. Also, the central bank has slashed interest rates to near zero, leaving little or no room for further credit easing. That leaves the yen, which if it were weaker might help make Japanese exports be more price competitive overseas.

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