Dollar Can't Have It Both Ways This Week

It's an either/or scenario for the dollar this week, with the greenback likely to either fall against the euro and rise against the yen, or rise against the euro and fall against the yen.The performance of U.S. and global stock markets is likely to play the key role in the path the dollar takes, especially after a meeting Friday of finance ministers from the Group of Seven leading industrial nations failed to provide any surprises for currency markets.The final draft of the G7's post-meeting statement said exchange rates should "reflect economic fundamentals" and that "excess volatility and disorderly movements" are undesirable. Such remarks are typical post-scripts to G7 meetings.Also as expected, the statement didn't specifically mention the dollar's weakness or the euro's strength.On the surface, this now sets up the dollar to continue its descent against the euro this week. Analysts said it could easily plumb new depths this week as investors sell the greenback on expectations of further U.S. economic weakness and likely interest rate cuts by the Federal Reserve.This scenario could boost the dollar against the yen, as a focus on rate cut expectations might help struggling U.S. equity markets rebound from their heavy losses last week.But on the flip side, if stock markets continue to suffer this week, risk aversion could quickly become the driving force in currencies.This would allow the dollar to reverse some of last week's losses against the euro, as investors would likely pull out of their riskier bets on the euro and other higher-yielding currencies funded by the yen, or in some cases by the dollar. Analysts say the dollar is being used more frequently as a funding currency due to general dollar weakness and a trend toward lower U.S. interestrates.The dollar would likely fall versus the yen, however, if stock markets keep ticking lower - since risk aversion typically benefits the yen more than all other currencies."It's a tricky week for the dollar, and the question is which forces are going to dominate? Investors' sentiment and risk aversion, or rate expectations?" said Rebecca Patterson, global currency strategist at JP Morgan in New York. "The problem is that investor sentiment is constantly shifting, sometimes every five minutes."Against this backdrop, currency analysts said the euro could trade in ranges between $1.4175 and $1.4375, while the dollar could trade between Y114.0 and Y116.0.Friday afternoon in New York, the euro was at $1.4295, little changed from $1.4293 late Thursday, while the dollar was at Y114.79, down from Y115.63. The euro was at Y164.12, down from Y165.31. The U.K. pound was at $2.0500, up from $2.0448, according to EBS. The dollar was quoted at CHF1.1678, down from CHF1.1703.Post G-7 Has Been Good To GreenbackTom Levinson, vice president of foreign exchange strategy at ING Wholesale Banking in London, said that based on an analysis of recent G7 meetings, he believes the dollar could rise next week against its rivals."We looked at G7 meetings starting from 2005 ... and found that the dollar typically does well in the week that follows," he said.While the post-meeting statement failed to call out the dollar's weakness or the euro's strength as worrisome developments, it did highlight the Chinese yuan, saying China needs to accelerate the appreciation of its currency.The G7 praised China for its decision to make its currency more flexible, but added: "In view of its rising current account surplus and domestic inflation, we stress (China's) need to allow an accelerated appreciation of its effective exchange rate."This, analysts say, might give the yen some support this week, as any perceived strengthening in the tightly-controlled yuan could have a similar effect on the yen, a proxy currency of sorts for all Asian currencies.U.S. Treasury Secretary Henry Paulson, speaking to reporters after the G7 conference, reiterated the G7's call for currencies to reflect fundamentals and added: "I believe in a strong dollar." He's made such remarks many times in the past.Light Week For US Data, Fed SpeakersThe slate for U.S. economic data out next week is light, but an existing home sales report Wednesday and new home sales data out Thursday are sure to be closely watched by currency investors and could work against the greenback versus the euro.While everyone knows the U.S. housing market is weak, miserable data out last week on housing starts showed that these reports still have the potential to cause harm to the greenback."You can still get a pretty negative reaction to U.S. housing data," Levinson said.Other data include durable goods Thursday and the Reuters/University of Michigan consumer sentiment survey, due Friday morning.Overseas, a key report will be Germany's Ifo business climate survey, due Thursday. Economists say it should ease back only modestly in October on higher oil prices and a strong euro, while the impact of the credit crunch continues to filter through.Meanwhile, the slate for speeches by Federal Reserve officials is also light this week, perhaps given that they tend to rein in their public comments about a week before policy meetings.On Oct. 30 and 31, the Federal Open Market Committee meets to determine whether to adjust rates again after it cut the federal funds rate to 4.75% last month on signs of a slowing U.S. economy.Fed Governor Randall Kroszner speaks Monday morning in Washington, while newly installed Chicago Fed President Charles Evans speaks Monday evening on his home turf.Finally, Fed Governor Frederic Mishkin speaks in New York this Friday.Markets are now giving nearly 100% odds that the Fed will cut rates another 25 basis points at its end-of-October meeting.Analysts say it will be interesting to see whether Fed officials make comments next week to try to alter those expectations if they don't believe the market has it right.Fed Chairman Ben Bernanke said Friday that rate policy predictability is "critical," which might suggest that the Fed doesn't want to surprise the markets with its rate decision this month after its greater-than-expected half-point cut in September.

Asian Stocks Fall As Risk Aversion Picks Up

A resurgence of concern about the health of the U.S. economy has pushed Asian stock markets sharply lower Monday as investors retreat to less risky assets.
The decrease in risk appetite has also shown up in a rising yen, and drops in several other Asian currencies. Gold, usually a safe-haven asset, has slipped as traders book profits in commodities, too.Bourses have made several attempts to come off their lows for the day, only to run into further selling. All indications are the declines will continue as U.S. markets open later Monday with Nasdaq 100 futures quoted 0.8% lower in screen trade and S&P 500 futures down 0.6%.The moves follow a selloff Friday in the U.S., after industrial equipment maker Caterpillar cautioned the U.S. economy will be "near to, or even in, recession," next year. That comment helped push the Dow Jones Industrial Average down 2.6%.That has raised fresh concerns about the ability of the U.S. economy to weather a housing slowdown, even if consumer sentiment indicators and the jobs market have held up fairly well. On that front, investors will have much to consider this week, in the form of data on U.S. home sales, durable goods orders and consumer sentiment."We anticipate little good news" wrote Marshall Gittler, chief Asian strategist at Deutsche Bank Private Wealth Management, in a note to clients.Rather, he expects to see evidence that the U.S. is slowing while Europe moderates and China remains strong. That is likely to keep stock markets volatile and the U.S. dollar weaker, "unless the data are bad enough to suggest another Fed rate cut," at the Federal Reserve's policy meeting next week.Expectations for a further cut in U.S. rates are high. November federal-funds futures at Friday's close in the U.S. were pricing in a 94% chance for the FOMC to cut rates to 4.5% at the Oct. 30-31 policy meeting, compared with the 70% chance priced in Thursday. At one stage Friday, the contract was fully priced for such a move."While we may not agree that another cut is appropriate, we doubt the Fed will risk not meeting market expectations," wrote Societe Generale Asian currency and rates strategist Patrick Bennett.Bennett argued that the selling in Asia is overdue."We have been concerned in Asia that recent strength has been too much too soon and in many cases has been unsupported by stable long-term inflows," he wrote.Among bourses, Korea's Kospi Composite was off 4% to 1,892, Japan's Nikkei 225 Index down 3.2% to 16,277, and Hong Kong's Hang Seng Index was off 3.2% to 28536, and the Straits Times Index in Singapore was off 2.6% to 3,651.The S&P/ASX 200 index in Australia was down 2.3% to 6,551.30, and in China the Shanghai Composite fell a further 2.3% to 5,684.In Japan, export-related shares were predictably weak on the stronger yen, with Sony Corp. (6758.TO) down 1.9% at Y5220, and Sharp Corp. (6753.TO) down 4.2% to Y1823.In Korea, big-cap stocks were leading the market lower as foreign investors sold, with Samsung Electronics (005930.SE) down 3.1% at KRW523,000, Posco (005490.SE) down 3.3% at KRW584,000 and Hyundai Heavy (009540.SE) off 4.6% at KRW437,000.Adding to negative sentiment was the anniversary of Black Monday: The October 19, 1987 U.S. market crash which saw the DJIA sink 508.32 points for a record percentage loss. "Investor psychology will be very nervous about the prospect of another Black Monday," said RBC Capital Markets, adding "crude oil hovering just under 90 dollars a barrel won't help."Barclays Capital chief JGB strategist Masuhisa Kobayashi said "this situation could compare with August" - when stocks dropped and bonds rallied around the globe at the height of the U.S. subprime mortgage-related credit crisis.

Weekend's Featured: G7 Meeting: Finance Leaders Have Full Plate

Faced with soaring oil prices, a falling dollar and the worst credit crisis in nearly a decade, the masters of global finance have a simple message for jittery markets: Be calm, we are keeping an eye on things.It probably didn't help, however, that the new assurances came exactly 20 years from the date of the worst market meltdown in U.S. history.The meeting of finance leaders from the Group of Seven industrial countries coincided with the anniversary of "Black Monday," Oct. 19, 1987, when the Dow Jones industrial average plunged by 22.6 percent, its biggest one-day percentage loss ever.While Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and their G-7 counterparts did not dwell on those long-ago eventsq during their discussions Friday, the anniversary served as an eerie reminder that the global economy does not always perform as its handlers wish that it would.It didn't help that while the policymakers were holding their discussions in Treasury's ornate Cash Room, the Dow Jones industrial average was plunging by 366.94 points, or 2.64 percent. It was the third-biggest point drop this year and reflected in part oil prices that momentarily climbed to a new record, above $90 per barrel.The problems this year came to a boil when credit markets essentially froze on Aug. 9 as fear overwhelmed many investors.Troubles that began in the market for subprime mortgages have spread to many other kinds of debt. The credit crunch has been similar in intensity to the crisis that hit the global economy in August 1998 after Russia devalued the ruble.Paulson, speaking to reporters after Friday's meeting, said the G-7 officials are watching market developments closely.However, in their joint statement of goals, the officials essentially rehashed previous bland assurances about cooperation in such areas as limiting volatility in currency markets. Absent were any examples of where big differences in approach had been resolved.European finance ministers had hoped the Bush administration would agree to more forceful actions to limit the sharp fall in the value of the dollar, which has hit record lows against the euro. That has helped American manufacturers by making their goods cheaper in European markets but is pinching European companies.Paulson said he told the other G-7 officials that a strong dollar is in the best interests of the United States, an oft-repeated view that the Europeans complain is not being backed up with any action to halt the dollar's slide."I heard my colleague Hank Paulson say a strong dollar is good for the American economy. I hope the market will hear him. That's not the case today," complained French Finance Minister Christine Lagarde.There also was no meeting of minds on the issue of whether all the credit market turmoil pointed to a need for tighter regulations, especially of hedge funds, the giant pools of cash that are largely unregulated.The United States wants to keep them that way, declaring that government interference will slow market innovations, while France and Germany have been pressing for increased oversight.German Finance Minister Peer Steinbrueck said he was pleased to see progress was being made in coming up with proposals for "best practices" for hedge funds although the United States is insisting those practices be voluntary.Paulson said the G-7 officials, who will continue talks through the weekend as part of the fall meetings of the International Monetary Fund and World Bank, believe the global economy is on the mend."The consensus was that markets are better than in August," he told reporters. "It has been slowly improving, but it is going to take awhile."But in its new forecast, the IMF trimmed its estimate of U.S. growth next year by almost a full percentage point and warned that the prospects for the global economy are "firmly on the downside, centered around the concern that financial market strains could deepen and trigger a more pronounced global slowdown."If things do get worse, it is entirely possible that the G-7 countries will find the political will to take more forceful actions. But the problem is they may be out of practice because the world economy had been doing relatively well until this year."You have oil prices surging to record levels and a global credit crisis and currency volatility," said David Jones, chief economist at DMJ Advisors, a Denver-consulting firm. "It has been a long time since the G-7 has faced this many financial threats."

Weekend's Featured: IMF Vows to Move with Times, Boost Role of Developing Countries

The IMF, under pressure to move with the times, backed reforms Saturday to give low-income countries a stronger voice in its decision-making and defended its response to recent financial market upheaval.Policymakers from the International Monetary Fund also bowed to insistence from member contries that the Fund shore up its shaky finances, pledging to cut costs and boost efficiency.The commitment came in a final statement issued after a meeting here of the IMF's steering committee, held as the 63-year-old Fund was being pressed to accord greater representation to currently under-represented non-Western countries.The committee said reforming the IMF "should enhance the representation of dynamic economies, many of which are emerging-market economies, whose weight and role in the global economy have increased."Such countries should see their voting share increased, the committee said, adding that "the voice and representation" of poor countries would also be strengthened.It said all elements for an internal reform package, including an increase in the quotas that determine a member's voting rights, should be in place by the time of its next meeting in April 2008.The IMF in September took an initial step toward overhauling its management structure by raising the quotas for four rising economies, China, South Korea, Mexico and Turkey.The Fund is now in the midst of a second round of reforms, which was under discussion here.While the action taken Saturday was hailed by some IMF officials as a clear advance, outgoing IMF Managing Director Rodrgio Rato cautioned that "we are in an interim moment.""Today there has not been any final agreement," he said, adding that details of the reform still needed to be thrashed out.Brazilian Finance Minister Guido Mantega earlier in the day implied that the IMF had in fact been slow to act on reform, attributing the hold-up to "resistance to change on the part of developed countries, which are over-represented in terms of voting power."The distribution of quotas is determined according to complex mathematical formulas. Moves to adjust the share-out have been the subject of sometimes bitter debate, with certain industrialized nations reluctant to give ground to emerging-market members.The Fund also came in for criticism from the Group of 24 developing countries for what it said was the Fund's failure to foresee the recent meltdown on financial markets, which erupted following a collapse of the US high-risk -- or subprime -- mortgage market.The G24 said the IMF should perhaps spend as much time monitoring advanced economies, where the turbulence originated, as it does the economies of less developed countries."Allow me to point out the irony of this situation," Mantega of Brazil said."Countries that were references of good governance, of standards and codes for the financial systems, these are the very countries that are facing serious problems of financial fragility putting at risk the prosperity of the world economy," he said, referring to major industrialized nations such as the United States."The Fund had little to say that was practical about this crisis," he said. "It has been excessively cautious in its recommendations. It justifies this caution by pointing to the unprecedented nature of the problems."But Rato countered that the Fund last April was "already very clearly stating our worries about the subprime segment in the United States."And at the Group of Eight summit in Germany in June, he said, he spoke in the name of the Fund and had made it clear the IMF was "worried about the complacency and the quality of some of the deals that were being done at the time in the markets."The IMF, whose mission is to promote international financial stability, is also struggling with its own finances as many newly cash-rich countries repay debt, leaving it without critical interest payments.The current situation had sparked calls from several committee members, notably from the Group of Seven industrialized powers, for the Fund to streamline its finances.The committee said Saturday it "recognized" the need for more predictible and stable sources of Fund income, notably from a reduction in administrative costs and greater management efficiency. It said "a new income model" should be drafted for debate at its April meeting.

European Union Summit: 3 Countries Call For Financial Market Stability

The European Union should play a leading role identifying and responding to risks in global financial markets, the U.K., France and Germany said Friday.Recent financial-market turmoil, which stemmed from bad subprime mortgages in the U.S., showed that some investment instruments are "insufficiently transparent" and that current oversight is inadequate, U.K. Prime Minister Gordon Brown, French President Nicolas Sarkozy and German Chancellor Angela Merkel said in a joint statement.The leaders asked E.U. finance ministers to study whether new regulations are needed, particularly for structured financial products, banks' off-balance sheet risks and ratings agencies.The E.U.'s 27 heads of state in the early hours of Friday morning ratified a new treaty aimed at streamlining the bloc's bureaucracy and boosting cooperation on everything from foreign affairs to policing. Their talks then turned to worries about Europe's economy. The strong euro is beginning to tax exports, oil prices are at a record high and recent financial-market turmoil isweakening investors' confidence."Recent financial-market turbulence will affect growth in the world economy, particularly in the G7 countries," Brown told a news conference.He noted that the U.K. and other members of the Group of Seven leading industrial nations will discuss global economic issues at a meeting in Washington, D.C. Friday.A key concern for the 13 countries using the euro has been the currency's climb against the U.S. dollar and Japanese yen. Sarkozy had been a solitary voice calling for the European Central Bank to cut interest rates to reverse the euro's ascent, but after a meeting of euro-zone finance ministers last week, countries agreed to cooperatively pressure China to untether the yuan andurge the U.S. to pursue a stronger dollar. The euro hovered above $1.43 Friday, near a record high."Not everyone agrees that the euro is overvalued, but everyone agrees that some other currencies are undervalued," Sarkozy told a news conference Friday.Sarkozy and other E.U. leaders are worried about the bloc's growing trade deficit with China. E.U. data published earlier Thursday showed the trade deficit with China grew to EUR86.1 billion in the first seven months of this year, compared with EUR68.9 billion in the corresponding period last year