Money slides to Japan as crisis deepens

A subtle re-alignment is occurring among the world’s major currencies – and there’s a message in that for you.

The Japanese yen is now close to its strongest level against the once almighty greenback in 13 years, hitting 88.31 to the $US  early today.

With that appreciation likely to continue, it is now safe to say  that  the yen is now acquiring the status of a safe haven, or reserve currency.

But that’s all in the world of high finance, isn’t it.  It can’t mean anything to me, can it?

Sadly, the answer is that changes like these are important to all of us.

To see that, all we need to do is  ask ourselves why this is occurring.

This realignment is happening because the world is rapidly losing faith in the US economy.

Currency traders are betting that the $US will be weak, for most of this year, at least.

It’s not hard to see why.

The US economy, itself,  is weak – and likely to remain that way for 12 months, at least.

Two indicators, in particular, reflect that.

• Established home sales are still falling in America, even though prices have already plunged and
• Republicans are preparing to fight President Obama’s already probably inadequate stimulus package, because they believe it does not contain enough tax cuts.

The yen is also gaining strength against the euro, as the effects of the global economic crisis spread, hitting the German economy particularly hard.

So is the Japanese government delighted about all this?  Probably not.

A strong currency, that acquires even something of the the status of  a global reserve, is certainly a national honour.

But that honour comes at a price.

Sterling’s place, as a reserve currency in the immediate post war years, ultimately became a burden that contributed to Britain’s decline in world affairs.

Those tempted to predict that the US will decline, too, may have a point.  But, we believe, they seriously understimate the resilience of the American economy.

US bankers, in particular, have certainly made their full share of mistakes and their role, in precipitating the global economic crisis, has been huge.

Let us not forget, though, that the role of  the $US as a world reserve currency has also had a small, but still important part, in producing the US recession.