INTERNATIONAL. In a story with important travel retail repercussions the US Dollar slumped to a two-and-a-half year low against the Japanese Yen on Friday amid worsening losses in credit markets.

The US economy showed more signs of sinking into recession amid widespread concerns over the subprime mortgage crisis. The Dollar also dropped to a record low against the Swiss Franc.

“Further weakness is in store for the Dollar as financial companies underperform,” Kamal Sharma, a London-based currency strategist at Bank of America Corp, the second-largest US bank told Bloomberg. “The equity markets are shaky and the Yen should remain robust.”

Travel retail’s inherent internationalism is a considerable buffer when one or more of its key drivers is negatively affected

The Yen currently (Sunday morning GMT) stands at 106.93 to the US Dollar having traded below 106 on Friday, the first time the greenback has softened that much since May 2005. The Dollar also fell against the Euro to 0.64, the lowest point since the record high set in November.

The Yen’s position against the Dollar compares with around 114 in the last days of 2007 (and 124 last June). Its strength is good news for retailers such as DFS in Hawaii where the value of the Yen is of critical importance in driving the travel retail spend.

But the bigger issue for travel retail is the state of the global economy rather than current gains or losses caused by currency. As we pointed out in last week’s Leader in The Moodie Report PDF and e-Newsletter, a strong Yen isn’t much good to our sector if the Japanese stop travelling.

“Japan is very, very likely to go into recession,” Cantor Fitzgerald LP Chief Asia Economist Uwe Parpart told Bloomberg last week. “The impact from a stronger Yen is on earnings and then, from there, on wages and investment.”

Japan’s leading tour operator JTB Corp said cautiously last week that outbound travel should grow marginally in 2008. But it noted increasing consumer uncertainty caused by the US economic outlook and soaring oil prices. Both factors, accentuated by higher fuel surcharges, will blunt demand – especially long-haul, and among those with lower incomes.

Some pundits think it could get a whole lot worse, in Japan, the US and elsewhere. “˜Japan teeters on brink of crash’ ran a headline in the business section of the UK’s The Daily Telegraph last week. It described the Nikkei Index’s worst start to a year since 1945, prompting Prime Minister Yasuo Fukuda to pledge intervention if required to prevent recession.

We have been in a worldwide financial bubble for a good while now, and it is bursting

The Independent in the UK carried a dramatic front-page cover on Saturday proclaiming “˜Everything points to recession’, citing a retail sales slump, the Pound Sterling at a record low, a crash in property and share prices, rising repossessions, more bankruptcies, soaring fuel prices and higher inflation. Business Editor Jeremy Warner asked: “Can we still hope for just a mild downturn or will it be one of the big, searing ones like those of the 1970s and early 1990s?”

That question will be asked by many travel retailers around the globe in coming days, from South Korea to Japan to the US to Europe.

In South Korea last week renowned American social scientist and monetary expert Immanuel Wallerstein warned that the country will be dragged into a global recession despite the new government’s pledge of aggressive growth.

“We have been in a worldwide financial bubble for a good while now, and it is bursting,” Wallerstein said. “When things go down economically, the issue is not whether you’re going, but are you going down more.”

Travel retail’s fortunes are driven by a host of factors, ranging from economic conditions to currency strength to tourism trends. The sector’s inherent internationalism is a considerable buffer when one or more of those drivers is negatively affected, which is why a balanced geographic portfolio is so important to, say, a publicly listed retailer such as Dufry.

So far there is no need for panic but there is cause for concern. It’s a time to watch travel demand carefully and to monitor closely the impact on individual economies of events in the US.

NOTE: For an excellent Wall Street Journal article ‘What a Recession Could Mean to You’ click here.