While not yet in the same league as other popular emerging market currencies, the Brazilian Real and Mexican Peso are sure to join their ranks soon; both currencies have risen markedly over the last few years, and have performed especially well in the year-to-date. They have been propelled by interest rates that are generously high, especially compared to those of the US and EU. Brazil’s benchmark rate currently stands at 13%, while Mexico’s equivelent rate is slightly lower, at 8%. In fact, interest rates are quite high throughout the region, including in Peru and in Chile. Anlaysts expect most of these Central Banks will further tighten their leding rates because of surging inflation, which would provide further impetus to the upward marches of their respective currencies against the Dollar. Reuters reports:

“We see EMEA (European, Middle Eastern and African) central banks as reaching the end of their (monetary) tightening cycles, whereas there is still more to go from Latin America,” wrote Barclays Capital.

Read More: Latam inflation eyed for currency impact

Originally posted here:
Inflation Drives Latin American Currencies

The parallels between the Australian Dollar and the Canadian Dollar are remarkable! Both currencies are backed by economies highly dependent on natural resources. Both countries’ Central Banks are considering rate cuts in response to slowing growth. Finally, both currencies have slipped well below parity with the US Dollar. Unlike the Canadian Loonie, the AUD had never quite breached the mythical 1:1 level with the USD. Furthermore, given the deteriorating economic picture in Australia, parity is off the table for a long time.

Demand for Australia’s vast natural resources had begun to taper in response to rising prices, and now that prices have softened, exports are off even more. The Central Bank of Australia is indicating that it considers this drop in demand more of a threat than rising inflation. Accordingly, it will attempt to cushion the blow by lowering rates, perhaps as soon as next month. The Australian Dollar’s status as a beneficiary of the carry trade- because of the lofty 7.25% benchmark interest rate- may soon come to an end. Bloomberg News reports:

Investors have increased bets the central bank will cut borrowing costs. [It] will lower the benchmark rate by 91 basis points, or 0.91 percentage point, in the next 12 months, showed [one index].

Read More: Australia Signals First Rate Reduction in Seven Years

Excerpt from:
AUD: So Much for Parity

Last week, the Forex Blog covered an IMF report that claimed the period of Dollar hegemony is nowhere near finished. This view appears to be widely held, and an American economist argued in a recent op-ed piece that the Euro still trails the Dollar in terms of global prominence. Certainly, he acknowledged the collapse in confidence that has sent the Dollar spiraling downward over the last few years. Central Banks are holding an ever-increasing portion of their reserves in alternative currencies, namely Euros. Many new bond and stock issues are denominated in Euros. But ultimately, the Dollar is still Numero Uno.

However, the potential exists for the Euro can one day catch up the Dollar, such that the world’s financial system would rest on two equal pillars. The key, argues the aforementioned economist, lies in better governance. The European Monetary Union lacks coherent leadership, preventing it from projecting power outside the EU and increasing the role of the Euro in the global economy. In addition, the process by which EU economic and monetary policy is determined lacks transparency. The current structure encourages members to act selfishly, and there is tremendous disagreement and controversy surrounding even minute issues. Until this system is reformed, the Euro cannot seriously hope to compete with the Dollar.

Read More: Reforms that would help euro punch its weight

See the original post:
Euro Needs Better Governance

In a recent report on the state of the Dollar, the International Monetary Fund (IMF) declared that the Dollar’s unprecedented period of dominance will not likely come to an end anytime soon. This assertion seems to sharply contradict the 25% depreciation (in trade-weighted terms) that has taken place since 2002. Moreover, many countries have liberalized their exchange rate regimes, such that they no longer need to maintain large stores of Dollar assets. The report’s conclusion draws strength from another period of sustained Dollar depreciation (which took place from 1985 and 1991), which was likewise not able to shake the currency loose from its moorings. The IMF does concede that Central Banks will probably continue to diversify their reserves in Euros, especially as EU capital markets continue to be seen as a stable alternative to those in the US. In the end, however, they see the Greenback is King. The Daily Monitor reports:

“Notwithstanding the dramatic claims by some, there is no doubt that the dollar will retain the central role, even though it may gradually share the stage with other currencies to a greater degree than at present.”

Read More: US dollar to remain global currency

Originally posted here:
IMF: Dollar Remains Paramount

At the Fed’s most recent monetary policy meeting, two Governors disagreed with the decision to hold rates constant, voting instead to hike rates by .25%. The most noteworthy aspect of the meeting was not the presence of dissent, but rather its irrelevance; it underscored that the Fed has been reduced to playing a largely symbolic role in the determination of American monetary policy. As the Fed cut rates aggressively over the last year, credit markets simultaneously witnessed a tightening of credit conditions. In other words, investors deliberately ignored the actions of the Fed, and market-clearing interest rates remained well above the rates “suggested” by the Fed. Some commentators have connected this to the recent rally in the Dollar, which would have been expected to plummet given such low interest rates. Barron’s reports:

The credit cycle will progress with or without central bankers. If their rhetoric convinces investors of the Fed’s probity, it’s all to the good. But market forces are far stronger, and they’re what should be watched.

Read More: Raise Rates, If It Makes You Feel Better

Read more from the original source:
Fed Losing Control Over Monetary Policy

Yesterday, the Forex Blog reported that Central Banks and Sovereign Wealth Funds appear to be losing confidence in the Dollar. To follow up with a specific example, a high-ranking Chinese policymaker recently suggested that China should move spend some of its reserves since they are rapidly losing value in RMB terms. The official offered that a portion be used to purchase foreign energy assets, in order to mitigate against both the falling Dollar and rising oil. There is clearly a trend among institutional holders of Dollars to use the currency to purchase US assets. Witness the recent (separate) sales of the Chrysler and GM Buildings to Middle Eastern buyers. With nearly $2 Trillion in foreign exchange reserves, however, China is in a class by itself, and any indication of its frustration with the Dollar should be taken very seriously.

Read More: China Considering Using Forex Reserves

Originally posted here:
China May Dip Into Reserves

Earlier in the week, the Forex Blog reported that the potential for intervention in the forex markets seemed to have declined, due to a brief Dollar rally and toned-down rhetoric at the most recent G8 conference. However, we would be remiss if we didn’t point out that the intellectual justification for intervention remains. While statistics have not been forthcoming, it appears that Sovereign Wealth Funds and Central Banks are paring their exposure to Dollar assets, which is both a cause and effect of Dollar weakness. In addition, the falling Dollar and rising oil prices have reinforced each other, and contributed to surging inflation around the world. Investment Banks are advising clients now would be a perfect time for the world’s economic policymakers to take coordinated action. GoldSeek.com reports:

In his testimony yesterday, Ben Bernanke, stated that “dollar Intervention should be done rarely” but that it “may be justified in disorderly times.”[In addition,] Treasury Secretary Paulson said last month that he would never rule out currency intervention as a potential policy tool.

Read More: U.S. Government To Intervene in Markets to Prevent Run on the Dollar

Read more here:
FX Intervention: Still Possible

After a brief hiatus, the Australian Dollar has resumed its upward march against the Dollar; its next milestone will be a 25-year high against the Greenback. Of course, its continued strength is due to a combination of high domestic interest rates and high commodity prices. In fact, its performance seems to mirror the price of gold, which is no coincidence since gold may be Australia’s most valuable export. In addition, gold has value as a monetary instrument, which means an appreciation in gold can give the Australian Dollar a double-boost by lifting it while simultaneously punishing the US Dollar. With regard its domestic monetary policy, Australian inflation recently passed the 4% mark, which means interest rates (already at 7.25%) are likely to stay high for a while. The countdown to parity continues, reports Bloomberg News:

The local dollar rose to its highest since
2000 against the New Zealand currency before an inflation report
tomorrow that may support the case for the Reserve Bank of Australia keeping interest rates at a 12-year high.

Read More: Australian Dollar Trades Near 25-Year High as Commodities Rally

Read the rest here:
AUD: Closer to Parity

The economic picture in Canada is increasingly resembling that of the rest of the world: slowing growth and rising inflation. Likewise, the dilemma faced by the Bank of Canada mirrors that of the ECB and Fed. Even though Canadian inflation is only 2.2%, the Bank of Canada will probably err on the side of caution, by hiking rates rather than lowering them. Then again, analysts don’t expect the Central Bank to take any action for another six to twelve months, based on the expectation that a cooling economy will naturally bring down inflation. That makes this whole debate seem moot, given how much could happen in such a long time frame. Canada.com reports:

Canadians will get a better idea of the central bank’s thinking when it releases its monetary policy update and governor Mark
Carney opens himself up to public questioning at a news conference later on its
rate-setting decision…

Read More: Bank of Canada expected to steer a steady course on interest rates

Read more from the original source:
Canada to Hold Rates

In the year-to-date, the Chinese Yuan has already appreciated 6.5% against the USD, the fastest pace since the currency was famously revalued three years ago. This upward pressure has been built largely on the continuing inflow of speculative “hot money,” which was itself built on the expectation of further interest rate hikes, ostensibly needed to tame inflation. However, the Central Bank of China recently indicated a slight shift in its monetary policy, backing away from fighting inflation in favor of promoting economic growth. At least until after the Olympic Games conclude, China will henceforth ignore inflation, so as not to precipitate a slowdown that could jeopardize the Games. The Futures markets have been quick to react, and the consensus expectation for 1-year RMB appreciation has fallen from 10% to 5.4%. Bloomberg News reports:

Once the Olympics are out of the way, the vigil on inflation may have to resume.
But unless China gets flooded by speculative flows, a one-shot revaluation will
remain off the table.

Read More: China Won’t Stamp Out Inflation, Revalue Yuan

Original post:
Chinese Yuan Appreciation to Slow

In a bid designed to placate skittish investors, America’s Federal Reserve Bank announced that it will extend the duration of its liquidity facilities at least through 2008 and possible into 2009. It is hoped that the continued enabling (which began several months ago) of certain Wall Street firms to borrow on especially favorable terms will prop up faltering credit markets. Given that both credit conditions and the economy at large continue to flounder, this move seems more symbolic than anything. Analysts are divided about whether this increased liquidity will serve as a complement or a substitute for a near-term interest rate hike. Futures prices had previously reflected a 65% chance that the Fed would hike rates in September, but the bet is now closer to even money. Reuters reports:

Others…think liquidity
problems and inflation concerns are two separate issues.
[One analyst] believes that the Fed is still on track to raise rates in
September.

Read More: Dollar rises as Bernanke calms financial markets

More:
Fed Increases Liquidity

Global capital markets remain caught in a tug of war between inflation and economic growth. For most of 2008, the economic growth story prevailed as the Federal Reserve Bank cut interest rates aggressively to cushion the blow from the housing crisis. However, the pendulum soon swung to inflation and the Fed began to worry that perhaps it had lowered rates too far and may in fact need to hike them in response to surging food and fuel prices. In fact, the European Central Bank recently hiked its benchmark interest rates. Now, a slew of negative economic data threatens to shift the rhetoric back to the other corner. Securities and currencies have fluctuated wildly over this period, and investors remain unsure about which side the world’s Central Banks will err on. Currency traders need to look no further than credit markets for a snapshot of the current consensus, which often presages changes in currency valuations. A quick and dirty analysis would place American and Euro-zone short-term bonds side by side and compare the yields (or prices), as a proxy for the EUR/USD exchange rate. The Wall Street Journal reports:

Two-year yields in all three markets have been on a wild ride in June,
driven up by tough inflation rhetoric from central banks, then down
again by renewed worries about the credit crisis and the state of
financial markets.

Read More: Inflation and Growth

In a move that will shock some investors but please others, the European Central Bank has raised its benchmark interest rate by 25 basis points, to 4.25%. On several recent occasions, Jean-Claude Trichet had alluded to the possibility, in connection to soaring inflation. Critics, including several politicians, have countered that the ECB should also be cognizant of the macroeconomic picture in Europe, which is faltering amid the global credit crunch. But such naysayers should remember that the ECB is mandated to maintain price stability, rather than to explicitly facilitate economic growth. In any event, this move certainly throws a wrench into the forex markets. The Dollar had rallied over the last couple months, as traders had prepared for a narrowing US-EU interest rate differential in the medium-term. So much for that theory, reports The New York Times:

But the sharp rise in inflation has put Europe’s bank into a policy bind because it has been accompanied, in recent days, by evidence that the economy here is deteriorating much like that of the United States.

Read More: Eyes on Inflation, European Bank Raises Rate

The rest is here:
ECB Hikes Rates

The Indian Rupee has fallen to a 14-month low as a result of the sagging Indian stock market and surging inflation. Foreign investors have withdrawn $5.7 Billion from the Indian stock market in the first half of 2008, reinforcing the 30% drop in stock prices that occurred over the same time period. Meanwhile, the nation’s benchmark inflation rate has risen to the highest level in nearly 13 years, and investors are clamoring for the Royal Bank of India to do more. The RBI has already raised interest rates as well as intervening on the Rupee’s behalf in forex markets, as indicated by data on the RBI’s foreign exchange reserves. Both moves were explicitly aimed at combating inflation, but may also carry the unavoidable consequence of stunted economic growth. The Rupee will likely continue to be caught in the slipstream. Bloomberg News reports:

“The rupee is under pressure to weaken because the losses
in the stock market are raising concern about capital
outflows. The
currency could fall further if not for support from the central
bank.”

Read More: India’s Rupee Falls to Near 14-Month Low on Stock Market Losses

Go here to read the rest:
Indian Rupee at 14-Month Low

At its most recent meeting, the Fed voted to hold rates steady at 2%. Only one week ago, 90% of investors (based on interest rate futures) had expected the Fed to lower rates.