NEWS / Foreign Exchange

The external pressure may lead traders to increase bets that China will give some ground

USD ??“ The dollar recovered slightly against the major currencies this morning as lower global equity markets prompted investors to turn to safe-haven currencies. Last week, the dollar again sank to fresh lows against the major currencies as continued fears over the US sub-prime crisis proved globally pervasive. While the rise in risk aversion has given the dollar a boost, analysts still expect the greenback to remain weak in the long-term, especially following the notable absence of any comment on the currency at this weekend's G7 meeting. More prophetic, perhaps, were the comments out of the IMF prior to the G7 last weekend that it still views USD as overvalued and hence has pre-emptively deflated any arguments for stabilization. One of the major concerns facing the dollar ahead is the view that more foreign central banks will continue to diversify their FX reserves away from US Treasury securities. Looming over the coming week will be speculation about the upcoming FOMC policy meeting on October 31st. There is still considerable amount of uncertainty concerning the outcome of that meeting.

EUR ??“ The Eurozone currency weakened on Monday, sliding from a fresh lifetime high of $1.4348 set shortly after the G7 meeting, as traders pared back bets against the greenback. The dollar recovered with investors betting the greenback's fall in the short term may have been too far, too fast. Also the EUR??™s slide came amid declines from major European stock markets. Nonethless, the E-13 economic news continued to be positive as ZEW and the trade balance data beat expectations. However, the price gauge data missed their forecasts, which is viewed as dovish by the market as it shows little need for the European monetary authorities to tighten policy at this time. Also weighing on the EUR is Commerzbank??™s admission that it has not set aside enough to cover likely subprime-related losses.

JPY - Japanese stocks slipped last Wednesday after Wells Fargo announced that it lost almost $900 million on home equity loans fanning concerns on the global impact of the sub-prime crisis. The drop in the equity markets, however, gave the yen a boost as investors were prompted to sell higher yielding assets bought with Japanese loans. The currency had its best week against the euro in two months. This was a topic of concern at last weeks G7 meeting in Washington. Yen gains will likely extend this week as investors continue to unwind their carry-trade investments.

GBP ??“ Equity market woes weighed on the high-yielding pound early last week as investors and markets are still concerned about the possibility of a similar US style sub-prime mortgage melt-down in the UK. Below-target inflation rates (CPI rose 1.9% VS. 1.8% in August) have also reinforced market expectation that the BoE will not change rates again this year. However, the pound saw significant gains as GDP numbers in Europe??™s second largest economy rose 0.7%. Expect the pound to remain range bound prior to next week??™s Fed meeting on US interest rates.

CAD - The loonie slid as the greenback rallied today on comments by the BOC's Governor over the weekend about the currency's strength, thus causing concern among global investors. Dodge said the CAD's rapid rise was not strictly linked to the strong domestic economy or the weak US economy, but instead some of the loonie's rise was "type-two" appreciation, or speculative buying, not based on fundamentals.

MXN ??“ Mexico is better prepared to face a recession in the US than before and will likely grow faster than the IMF expects, said Mexico's Finance Secretary. Planned infrastructure spending will also help Mexico withstand a decline in exports to the US, its biggest trading partner.

CNY - Paulson, Trichet and the rest of the G7 called for an ???accelerated appreciation,??? of the CNY, the toughest language in four years. They will deliver that message when Trichet leads a European delegation to China next month and Paulson follows in December. The external pressure may lead traders to increase bets that China will give some ground and let the yuan climb.

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