♠ Posted by Emmanuel in Casino Capitalism
at 4/14/2008 01:52:00 AM
The G-7 meeting has come and gone. On Friday, 11 April, the finance ministers of the US, UK, Germany, France, Italy, Japan, and Canada had this to say on the matter of currencies:We reaffirm our shared interest in a strong and stable international financial system. Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate. We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate.While pressure has been applied to China for some time now, what is new is the mention of "sharp fluctuations in major currencies." This, of course, refers to the weakening dollar and the strengthening of other major currencies, most notably the Euro. What is notable to me at least is that there is no hint of possible coordinated action to stem further dollar weakness, i.e. intervention. Daily FX mentions that some currency traders were caught by surprise for they expected no reference in the G-7 statement to further dollar weakness. After considering fundamental factors such as expected rate cuts from the Fed and bad economic data in the US as opposed to reluctance to cut rates in the face of inflation in the Eurozone and relatively better economic data, the dollar is still on the back foot.
In early Tokyo trading, the dollar has gained sharply against the Euro. The Euro commanded around $1.5835 when markets closed last Friday. As I write, though, it is at $1.5688. Some traders believe it will be nearer to $1.5600 when New York trading concludes. Nevertheless, I think the dollar's boost is temporary unless some real coordinated intervention is mounted. That is, the G-7 will need to put its money where its mouth is at or else things will likely return to the status quo in the face of further helicopter drops and an endless torrent of bad US economic data. Reuters quotes a forex trader who makes some relevant points:
The reaction to the G7 in the market has been measured so far," said John Kyriakopoulos, a forex strategist at NAB. He noted the euro had been quoted around $0.15650 early and had already bounced from there. The dollar had also only made modest gains on the yen to 101.30So, of course, my answer is no., from 100.73 late in New York on Friday. "The G7 have put some two-way risk into the market but really the chance of concerted intervention still looks distant," he added. "On the intervention alert scale, we're probably around 5 or 6 now, up from 3 or 4 previously."
He thought the new wording on currencies sounded like a compromise between the Europeans, who likely wanted a stronger warning about the dollar, and the U.S. side which welcomed the boost to exports that a weaker currency gave.