The greenback fell further after the G-7 would not come to the rescue. The Group of Seven will let the dollar fall.
The heated climate before the Istanbul meeting led some to expect global policymakers to take a stand, but despite the strong tone, Andrew Wilkinson, senior market analyst at Interactive Brokers, said it was short on action. “It invites investors to test the dollar’s lines of resistance in order to see what response, if any, might be forthcoming in the event of a further fall in the value of the dollar,” Wilkinson said.
The dollar’s loss of value over the past six months has been a cause for concern for the world’s financial chief’s, Wilkinson said, and reasonably so because the greenback’s instability threatens financial markets and economies. (See “Playing The Downward Dollar.” and “Harrison Sees A Dollar Boom.”)
“Many currency traders were braced for some hint of intervention to prevail from this meeting,” Wilkinson said, “especially given several verbal warnings or complaints from central bankers and politicians who had warned against dollar weakness.”
The problem with intervention is that it would only be partially effective, especially if the U.S. isn’t on board. The Treasury Department would never admit this, but for the time being it’s in the country’s interest to keep its currency low because it stimulates exports for the economy’s manufacturing base and lowers the value of the debt that the Treasury is piling up.
The Australian dollar saw gains as the global economic outlook warms and speculation mounts that its central bank will raise rates this week. (See “Aussie ETF Spread Tastier Than Vegemite.”) The Aussie wasn’t alone though. As Wilkinson pointed out, the G-7 stance appeared to provide a green light for investors waiting to buy the dip in on commodity currencies.
By late-morning trading the Aussie moved up to .876 cents against the greenback, while the Canadian dollar ticked up to .929 cents, and the New Zealand dollar rose to .724 cents.
“The gains appear to be based upon the toothless nature of the G7 statement, which seems powerless to deter investors from buying currencies exposed to recovery,” Wilkinson said.
The yen saw some action against the dollar as well, strengthening to 89.62. The bump appears to be fueled by market volatility following Finance Minister Hirohisa Fujji’s multiple positions on the yen’s strength. This time around, as Wilkinson put it, his daily and apparently changeable dialogue indicated that the Bank of Japan would in fact intervene if the currency volatility Fujii’s been skirting around became ‘biased’.
“Investors are currently taking that to mean the BoJ will sell a stronger yen,” Wilkinson said. “But rest assured Mr. Fujii will likely state in coming days that he meant something altogether different.” Japan’s new government is attempting to walk to fine line between keeping its currency low to helps its exporters, while shoring it up to stimulate consumer spending.