EUR/USD: On the cusp of breaking through 1.5000, the next target beyond this level is 1.5500.
The pressure is rising on US authorities and possibly other G7 countries to provide more substantial support for the US dollar. Beyond the comments made by Bernanake (as highlighted above) we had stream of European officials, after the finance meeting, coming out yesterday to express their concern on the euro’s appreciations against the greenback.
ECB President Trichet said “We all note with considerable attention the statements made by American authorities as regards their support in favour of a strong dollar”. He also reiterated the G7 communiqué which stated that “excessive volatility and disorganised developments in the exchange market was bad for economic development”. Trichet comments were followed by Juncker, who lead the meeting and noted that ministers “discussed exchange rates extensively” and it was “a problem which worries us”. The French Finance Minister Lagarde was more direct on her comments to reporters noting “We want a strong dollar, we need a strong dollar”.
In previous Daily’s we have noted that a move above EUR/USD 1.5000 would escalate the concerns surrounding the US dollar weakness. The cross is on the cusp of breaking through this key psychological level and currency traders, for the time being at least, will probably continue to push the resolve of ministers to see where the pain threshold actually sits.
However, the weaker US dollar is also a product of the shift in trade balance and with the Chinese Yuan still not a floating rate currency. As such, it is not surprising that Trichet and Juncker announced that they will be traveling to China with the European Union Monetary Affairs Commissioner before the end of the year to discuss the Chinese currency and no doubt try and pressurise the Chinese authorities to speed up the pace of Yuan appreciation. Two years ago, when Chinese growth was stronger than it is now, this failed to work. But, looking forward, it is difficult to see how many of the key economies can allow this imbalance to continue on a structural longer term basis.
Sources: Reuters: BBC: Bloomberg: Lawshare: Deutsche Bank (db): Proquote: Financial Times: Wall Street Journal: CLSA: Sharescope: Market News. Capital Economics: CNBC: Wikipedia:
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