I believe that the defensive currencies like the yen and Swiss franc will continue to be well supported and trend upward over the coming months. There are even more reasons why this will happen — let’s delve into several of these reasons now.
Housing incentives just ended and mortgage approvals just dipped to a 13-year low as a result. Also, the Bush tax cuts that were enacted in 2001 and 2003 are set to expire at the end of this year unless Federal Reserve Chairman Ben Bernanke’s advice is heeded.
Bernanke recently told Congress that he favors preserving the Bush administration’s tax cuts to help the faltering U.S. economy.
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You know the economy is still riding on thin ice when the Fed governor suggested this. I’m sure that came as a real shock to Pelosi and the Democrats who want to allow the Bush tax cuts to expire and even raise taxes.
I’m sure they hated Bernanke’s comments because he was basically reiterating what the Republicans said needed to be done for a while now. It seems that the Republicans are more in tune to the economy right now than the Democrats.
Even Treasury Secretary Tim Geithner said that employers are very cautious about hiring and that they are trying to get more productivity out of the same workers because they fear that the economy isn’t growing fast enough to support hiring new workers.
Geithner also stated in a recent interview that the economy wasn’t growing fast enough. It seems that the Fed and Treasury are singing the same tune overall.
So things aren’t looking so hot economically right now. Seems the some of the folks on Capitol Hill just don’t want to spook investors too much and let them know entirely how bad it is.
The economy shouldn’t get any better over the coming months either because historically the third quarter is a rough one. Consumer spending is bleak because consumers are saving up for Thanksgiving, Christmas, and other year-end holidays. So they cut back in order to spend more in the fourth quarter.
This is one reason why many major stock corrections happen during this time. Many stock market crashes have happened in the months of September and October, for instance.
Another concern of mine is the weekly unemployment claims numbers. They were nose-diving (which would have been a good thing), but now they are treading sideways and seem to be hinting that they could begin to rise again soon.
Also, I don’t think investors are comforted by the passing of the recent financial reform bill that allows the government to break up large corporations that pose systematic risks to the economy. After all, it would be at the government’s discretion and not the company’s discretion if it was a candidate to be broken up.
It’s things like this that make me feel like we’re moving into more of a socialist type of government than a democracy.
Of course, the final reasons all have to do with the potential for an outbreak of wars.
We know that the United States has sent naval ships over to South Korea to train with that country. They’ve just started up their training exercises together, and North Korea is now threatening to use its nuclear weapons as a result.
Then there’s Iran — as of June, the United States and United Nations put sanctions on Iran due to its insistence on continuing its uranium enrichment program. Not only has Iran been cut off all over the world now, but the U.S. Treasury has threatened international banks that are accepting dollar transactions from Iran. The Treasury stated that they run the risk of being banned from the U.S. banking system.
At the same time, Iran is stating that it may stop receiving payments for its oil in dollars or euros and that it may instead choose to receive payments only in the UAE’s dirham.
All of this is tightening down the bolts a bit more on Iran and could spur it to take action sooner if it were to lash out. The first country that they would lash out at would be Israel. of course. Israel knows that and that’s why it may do a pre-emptive strike upon Iran first before that country is fully able to develop out its nuclear weapons.
Honestly, if any of these actions above happen (or any combination of them), it will cause the defensive currencies to do quite well over the coming months, and it will hurt the higher-yielding currencies as investors run for cover.
So get ready for some crazy times that most likely lie before us. It’s not going to be pretty out there, but for the currency investor there’s always opportunity no matter what happens. That’s the good news.
About the Author: Sean Hyman
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