Trouble in Japan and the U.K. add up to a stronger U.S. dollar

01/26/2010 12:00 pm EST


Jim Jubak

Founder and Editor,

Expect the dollar to keep moving higher in the near term.

Credit rating worries in Japan and disappointing economic numbers in the United Kingdom pretty much guarantee that the U.S. dollar will continue to gain on the yen and the pound.

On January 25 Standard & Poor’s lowered its credit outlook on Japan’s AA-rated sovereign debt to “negative” from “stable.” Japan’s government doesn’t have a plan to cut its budget deficits, S&P said. The cost of protecting against a default on Japanese government debt within the next five years in the derivatives market rose by 0.05 percentage points to 0.9 percentage points.

The long-term worry is that Japan’s aging population and stagnating economy will eat into one of the world’s largest pools of savings. Domestic Japanese investors hold 90% of the country’s debt.

And in the United Kingdom?

According to government figures released on January 26, the U.K economy moved out of recession—barely--in the fourth quarter of 2009. Gross domestic product rose 0.1% from the third quarter, the Office for National Statistics said. That still left the year-to-year numbers showing the economy contracting by 3.2% from the fourth quarter of 2008.

The “good news” was far short of the median 0.4% increase expected by economists, according to a Bloomberg survey of 33 economists. The actual results were worse than the lowest prediction—for 0.2% growth—in the survey.

With the economy growing so slowly, it’s likely that the Bank of England will put off any steps to withdraw some of the money it pumped into the economy during the worst of the Great Recession.

The pound dropped by as much as 0.7% after the news and traded at $1.6124 at 11:47 in London.
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