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FOREX VIEW:G7 Statement Provides No Relief For Yen, Dollar

Sat, Apr 14 2007, 23:15 GMT
http://www.djnewswires.com/eu

FOREX VIEW:G7 Statement Provides No Relief For Yen, Dollar


By Laurence Norman and Isabelle Lindenmayer
OF DOW JONES NEWSWIRES




WASHINGTON (Dow Jones)--The decision by the Group of Seven leading industrialized nations to make no changes to their views on currency issues leaves foreign exchange markets braced for more of the same in the coming week: euro strength, U.S. dollar declines and continued so-called carry trade bets that weaken the yen.

With a host of U.S. data due in the coming week, this opens the way for the euro to hit a new record high against the yen and for the single currency to test its 2004 high versus the dollar.

At Friday's spring meeting in Washington, the G7 repeated precisely what finance ministers had said about exchange rates in Essen, Germany, two months ago.

They again said currencies should "reflect economic fundamentals," described disorderly market movements as "undesirable" and called for countries with "large and growing current account surpluses, especially China" to allow movement in their real effective exchange rate.

Ministers made no explicit comment on yen weakness or carry trades, where investors borrow in low-yielding currencies, like the yen or the Swiss franc, to buy higher yielding assets.

European Central Bank President Jean-Claude Trichet said Japanese officials had commented that economic fundamentals were improving and that "this should be reflected in the foreign exchange market." Japanese Finance Minister Koji Omi had a different emphasis, saying, "I don't think there was anyone (among G7 officials) who specifically highlighted the yen and said it had problems."

Meanwhile, Bank of Canada Governor David Dodge said that G7 "views on the yen are exactly where they were the last time we met, that one should be very careful about placing one-way bets."

During the weekend's International Monetary Fund and World Bank spring meetings in Washington, the IMF said it is continuing work on updating the organization's foreign exchange surveillance role.

On Saturday afternoon, the IMF said China reiterated its pledge to take steps to increase currency flexibility, albeit in a "gradual and controllable manner."


No Surprise For Markets




Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Conn., said currency traders won't be "desperately surprised" by the lack of mention of the yen or the carry trade in the G7 statement. He said the yen had come under pressure in recent days partly on expectations there would be no change in the G7 language.

Ruskin said that comments on the carry trade by senior G7 officials at the end of February's meeting stirred "up a little bit of volatility but (they) generated nothing in terms of sustainable yen gains ... So I think there was a perceived green light in favor for the carry trade going into the meeting. Now, the light stays green," he said.

Ruskin said that should leave the euro in line to test key resistance levels against the yen, around Y162 or Y163. The euro Friday hit a record against the yen at Y161.46.

When markets open Monday, the euro could suffer some light profit-taking at first but "before the day's out, the yen should be weaker," Ruskin said.

Michael Woolfolk, chief currency strategist at the Bank of New York, agreed that for currency markets, the most significant news to come out of the G7 was "not what was said, but what was not said" about the yen and carry trades.

He said the group's communique also offered good news for emerging-market currencies, which have been bolstered by the carry trade but also benefit from strong global growth and high commodity prices.

"One of the things that we can take away from this communique is the broad-based agreement on the health of the global economy. G7 finance ministers believe the world economy is headed for a soft landing," Woolfolk said. He said it was also a positive sign that the communique had made no explicit reference to the recent equity markets volatility.

With the most senior Chinese officials staying away from the G7 meeting, there were no developments in the other international issue weighing on currency markets and the dollar in particular - the recent trade spats between China and the U.S.

Friday afternoon in New York, the euro stood at $1.3516 from $1.3489 late Thursday, while the dollar was changing hands at Y119.26 versus Y119.05, according to EBS. The euro traded at Y161.18 versus Y160.59 late Thursday.


Nearing An All-Time High




With the euro last week climbing to almost one cent shy of its all-time high against the dollar thanks to signals from the European Central Bank that it plans to raise rates in June and perhaps again after that, the single currency is very much ascendant, analysts said.

"Euro-dollar has breached resistance at the $1.3480 highs," Robert Lynch, currency strategist at HSBC, said Friday. "It would not take much for (the record level) to be reached," Lynch said. The euro's high against the U.S. currency is $1.3670, which it hit in December 2004.

Greg Anderson, currency strategist at ABN Amro in Chicago, said there are still a significant number of dollar bears who haven't wholeheartedly entered the market yet, underlying the scope for dollar declines.

"There is plenty of macro discretionary money that has yet to buy euro-dollar," he said.

The pressured dollar enters the new week facing a slew of U.S. data. The market will digest a March retail sales report, an April manufacturing report from the New York region, and a February report on net foreign purchases of U.S. securities. It will also face fresh comments Monday from a host of central bank speakers, including the ECB's Trichet and three U.S. Federal Reserve speakers.

The one release of the week that could reverse or at least temper the dollar's decline is Tuesday's consumer price index data.

Should March core prices - those excluding food and energy - remain even with the previous month's year-over-year advance of 2.7%, or even increase, that could "temporarily reverse the dollar's weakness," said Matthew Strauss, senior currency strategist at RBC Capital Markets.

-By Laurence Norman and Isabelle Lindernmayer, Dow Jones Newswires; 201-938-2096; [e-mail]

(Takashi Nakamichi, Andrew Peaple and Luca DiLeo contributed to this article)

(END) Dow Jones Newswires

April 14, 2007 19:15 ET (23:15 GMT)

http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=52b08e3e-2aad-44d4-9838-115a3eaf6ab8