The euro exchange rate rose over 1.5000 around 5 am ET today for the first time since Oct 26 as the market voted with its feet on the unemployment rate Friday and the failure of G20 even to mention Foreign Exchange and specifically the yuan. Reuters says "G20 leaves door open for fresh pressure on dollar rate," pointing out that Brazil (and Canada) had said ahead of the summit that they would bring it up.
The FT says "Furthermore, a report from the International Monetary Fund also weighed on the US dollar rate as it named the US unit as the currency of choice for funding carry trades, in which low-yielding currencies are sold to fund the purchase of riskier, higher-yielding assets elsewhere. The report said that while the dollar had depreciated in recent months, it still remained on the ‘strong’ side.”
Bloomberg elaborates a bit more on the IMF report, which was published just as G20 was meeting. “There are indications that the U.S. dollar is now serving as the funding currency for carry trades. These trades may be contributing to upward pressure on the euro and some emerging-economy currencies.” Bloomberg reports "While the dollar [in real effective terms]'has moved closer to medium-run equilibrium,' it is still 'on the strong side.'"
The IMF also says the euro exchange rate “is on the strong side of its equilibrium.” Hello? How can the dollar be on the strong side and the euro be on the strong side, too? The IMF doesn’t view the ever-changing market price of the euro/dollar as the benchmark and is using other measures, based on baskets, to derive “real effective terms.” This may be fine for ivory-tower economists but is not at all good for an agency that should have a higher sensitivity to the real world. Finally, the IMF said the yuan “has depreciated in real effective terms in tandem with the U.S. dollar and remains significantly undervalued from a medium-term perspective.”
In a word, bah.
Pounds Sterling exchange rate is rising strongly this morning, to over 1.6800, on a story that Kraft has until 5 pm ET today to increase its offer for Cadbury. M&A has often been a driver of the pound in the past. In dollar/yen, though, Friday’s big drop (from 90.75 to 89.59) has not been matched so far today. Still, it’s a breakout under the previous intermediate lows and we now await whether it also surpasses the Nov 1 low at 89.17.
Bye for Now
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