By: Dr. Mike Campbell
2012 seems to have got off to a much better start than many people feared it would. The Dow Jones Industrial average now stands at a higher level than it was at just prior to the worst falls of the global financial crisis, but it is still more than one thousand points adrift of its pre-crisis high value. The Nasdaq composite index which is heavily loaded with technology companies is at its best rate since 2000, but is still two thousand or so points off its peak before the high tech bubble burst in 1999.
In the USA, unemployment remains high, but has nudged downwards this year from above the 9% mark to 8.3% last month. Between 1948 and 2010, the average unemployment rate stood at 5.7% which indicates that unemployment has a long way to go before it falls back to the “background” level; but nevertheless, the data so far this year is heading in the right direction. The Federal Reserve has said that financial strains have eased and this means that a further round of quantitative easing (QE) has become less likely. Most analysts believe that QE, in which the central bank pumps money into the economy for the purchase of assets, puts a downwards pressure on the currency.
The US Dollar and other major currencies have been strengthening against the Yen since the start of February. The Dollar briefly traded above the 84 Yen mark today, before falling back, but it is still trading at an 11 month high against the Yen. Partially, the rise has to do with greater optimism about US and European markets; particularly after the second Greek bailout gained approval, but I think it has more to do with Japanese fundamentals. Japan was in the economic doldrums long before the global financial crisis hit and the Yen was trading at 171.66 in July 2008. Nothing positive has happened in the Japanese economy in the interim to warrant the Yen appreciating to its current level of 109.45 to the Euro. The gains were based on the concept that the Japanese Yen was a safe haven currency and anti-Euro sentiment triggered by the Greek crisis. A realignment of the value of the Yen is long overdue; the question is whether this is the start of it or just a short-term effect on the back of better European and American economic data.