G7 Spotlight On Currencies

Last week the G7, IMF Concerns Shifted To Forex Markets.

Global financial leaders turned the spotlight on currency markets over the weekend, seeking to restore market stability and prevent the financial crisis from taking another turn for the worse.

The Group of Seven leading industrial nations held back from unveiling bold new actions aimed at combating the crisis at their meeting Friday, though they committed to a range of regulatory changes that could reshape the workings of the financial system in years to come.

My Comment: One possible reason they held back on bold new plans is that the only bold new plan that would work would be to get the US to stop wasting money policing the world, and balance its budget deficit to support the dollar. The US of course would not agree to such a plan even if it was floated. So as with every G7 meeting, nothing was accomplished but a bunch of yapping.

The G7 finance officials gave a clear signal that the slide in the dollar and the surge in the euro weren't something they could ignore.

"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," the statement said.

My Comment: They may as well reaffirmed belief in the tooth fairy. Paulson reaffirms a commitment to a strong dollar every week without once ever affirming what it would take to change the long term trend: Spend less money and stop slashing interest rates. Short term, sentiment comes into play.

The group members gave no signs that they were ready to intervene in markets to prevent further dollar weakness. Instead, they promised to "monitor" and, in a stock G7 statement, to " cooperate as appropriate."

My Comment: Cooperate on what? Yapping about the benefits of a strong dollar?

However, Friday represented the first big change in the core currency statement since the February 2004 Boca Raton G7 statement, which warned that "excess volatility and disorderly movements in exchange rates are undesirable for economic growth."

My Comment: Is this supposed to be a revelation?

On Friday, the G7 statement included the biggest shift in currency policy in years, noting that there have been "at times sharp fluctuations in major currencies and we are concerned about their possible implications for economic and financial stability."

Some European officials, who have sounded increasingly alarmed about the record-high rise in the euro to above $1.59 last month, also conveyed a matter- of-fact tone about the shift.

European Central Bank President Jean-Claude Trichet declined to expand on the wording in the G7 communique, saying Friday, "It's like a poem: it speaks by itself."

French Finance Minister Christine Lagarde, who has been among the most vociferous about the dangers of a strong euro, called the policy change a " turning point."

Trichet: Communique Is Like A Poem

Kathy Lien at the DailyFx is wrote about the G7 Statement: Sharper Stance on Currencies last Friday. Let's see if we find any hint of poetry in the change in statements from February to April.

The G7 Statement from the meeting of Finance Ministers and Central Bankers were released on Friday and judging from the language, the attendees are worried about growth, the problems in the financial markets AND the fluctuations in currencies.

When the currency markets reopen on Sunday night, they may take this to mean that the concern of the G could compel COORDINATED ACTION!

APRIL STATEMENT:

“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.”

FEBRUARY STATEMENT:

“We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. 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.”

Are either of those statements poetic? Whether or not you think so, without the US taking actual action to shore up the dollar (shrinking the budget deficit and letting interest rates be) all that yapping isn't worth a hill of beans. However, anti-dollar sentiment is at an extreme so a bounce in the dollar could indeed come at any time.

Inquiring minds can click on the above link for the full text of the communique. Perhaps I missed something truly poetic.

Let's now consider a few charts on the Euro and US dollar index.

US$ Index Weekly Chart



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US$ Index 60 Minute Chart



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Euro 60 Minute Chart



Click on chart for sharper image

Down on Euro chart corresponds to up on US$ index chart. The Euro is the largest component of the US$ index.

Was there intervention tonight as Kathy Lien suspected there might be? Or was fear of intervention itself causing the desired reaction? Either way, short term fluctuations are meaningless. If the above move is a result of either intervention or yapping, it is not likely to stick. However, anti-dollar sentiment is so extreme, and so is a general love affair with the Euro. With that in mind, perhaps a bounce was simply overdue. Longer term, yapping is useless and so is intervention.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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