Peter Schiff on CNBC 10/25/10 [Archive]

Horn

26th October 2010, 08:49 AM

Scary to think these guys may start to replace a Fed chief as the maestro of the markets.

Dollar Falls After G-20 Seeks to Avoid Competitive Devaluations

The dollar traded near a one-week low against the euro after Group of 20 finance ministers and central bankers vowed to avoid weakening currencies to lift exports.

Officials called for more sustainable current-account gaps without embracing a U.S. proposal for targets, as they ended talks in South Korea on Oct. 23. The Australian and New Zealand dollars climbed for a second day on speculation the pledge will calm concern over trade tensions and a Nov. 3 Federal Reserve policy decision may signal the start to a second round of bond purchases, boosting demand for higher-yielding assets.

“The G-20 has shown no indication that the U.S. will back away from the large quantitative easing policy anticipated from the Fed,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “The euro is acting as the anti-dollar again because it’s the only major central bank which isn’t talking about quantitative easing at the moment.”

The dollar fell to as low as $1.3997 per euro, near its weakest since Oct. 15, before trading at $1.3958 as of 6:39 a.m. in Tokyo, from $1.3954 on Oct. 22 in New York. It was little changed at 81.38 yen, after touching as low as 80.90 yen. Australia’s currency gained 0.3 percent to 98.53 U.S. cents and New Zealand’s rose 0.2 percent to 74.81 cents.

G-20 officials pledged to refrain from “competitive devaluation” and to let markets set foreign-exchange values as they sought to calm fears that a trade war may break out if nations use cheaper currencies to spur growth.

This was the first time economic policy makers took a joint stance on exchange rates after previously resisting such actions for fear of alienating China. The G-20 statement still recycles language used at previous leaders’ summits in London and Toronto and falls short of the currency accords of the 1980s.

‘Weak Compromise’

“The final communique shows all the signs of a weak compromise between competing interests,” currency strategists at UBS AG said in a report. It should be “positive for risk appetite,” and would likely support the Australian and Canadian dollars, the Nordic and emerging-market currencies at the expense of the U.S. dollar, the bank said.

Citigroup Inc. strategists said the meeting “will serve to reinforce downward pressure” on the dollar against the major currencies as the communique fell “well short” of a 1985 Plaza Accord-style agreement to manage the dollar’s decline.

Australia’s dollar may benefit as it is “the most liquid currency with tight links to China,” they said in a report.

Dollar, Fed Easing

Bloomberg Correlation-Weighted Currency Indexes tracking 10 developed-world currencies show the U.S. dollar has been the biggest decliner over the past three months, falling 5.9 percent.

The Fed may purchase $2 trillion of assets to stimulate the U.S. economy, starting with a program of about $500 billion of buying over six months that is likely to be announced at the November meeting, Goldman Sachs Group Inc. said in a note to clients.

Asian nations will likely “back down” from physical intervention in the foreign-exchange markets to weaken their domestic currencies for the next few weeks, said Faros Trading LLC, which executes currency transactions on behalf of hedge funds and institutional clients.

“Doing so is not wise politically given the comments this past weekend,” said Douglas Borthwick, Stamford, Connecticut- based head of trading at Faros. “We believe Asian currencies will rally and the U.S. dollar will weaken.”

Policy makers in Japan are also likely to refrain from selling yen until after a G-20 meeting in November, he said.

Japan Yen Policy

Japanese Finance Minister Yoshihiko Noda reiterated Oct. 23 that Japan’s currency policy remains unchanged, saying the government is ready to counter yen gains if needed.

Seeking to appease critics, advanced economies agreed to be “vigilant against excess volatility and disorderly movements in exchange rates,” the G-20 said. U.S. Treasury Secretary Timothy F. Geithner said the U.S. backs a “strong dollar” and recognizes its global responsibilities.

The U.S. dollar’s recent drop and China’s restraint of the yuan have forced trading partners including South Korea and Brazil to temper gains in their own floating currencies to remain competitive.

Strategists at HSBC Plc said they saw potential for the dollar to appreciate as the statement did little to keep nations from taking steps to limit gains in their currencies.

“No country was named and shamed and those which recently put on forms of capital controls did not even get a wrist slap,” the strategists said in a report. “Any country considering capital controls now has the G-20 behind them and is free to act.” That’s a “positive scenario” for the dollar, they said.

http://www.bloomberg.com/news/2010-10-24/dollar-falls-after-g-20-meeting-pledges-to-avoid-competitive-devaluations.html