Forces that Reflate

Over the past several weeks the US dollar has been largely confined to well worn ranges against the major foreign currencies. The equilibrium implied by range trading environment might be giving investors a false sense of security. There are a number of developments in other markets that warn that the calm in the foreign exchange market might not last much longer. Specifically there have been significant declines in commodity prices, interest rates and premium offered by the US over the euro-zone.

G7: Lots of Thunder, Little Rain

Encouraged by French and German comments implying concern about the weakness of the yen, next week’s G7 and IMF meetings are taking on new significance in the foreign exchange market. Given the heightened uncertainty, speculative players are likely to continue to reduce their exposures in the days ahead. This means that the risk is on the dollar’s upside against the European currencies, but greenback is likely to under-perform against the yen.

There are unlikely to be fresh initiatives in the foreign exchange market. Indeed, if anything, the risk is that the statement is not as strong as the April statement, which it will be recalled included an appendix that seemed to call for a greater role for the currency markets to reduce global imbalance. The market understands official concerns about global imbalances to be a euphemistic way to talk the dollar down.