USD Mixed, Awaits Data Wednesday, September 13, 2006
The foreign exchange market continues to seek direction, with the dollar’s performance mixed versus the majors in the Monday session. The greenback advanced against the yen while relinquishing ground versus the euro. With the key G7 Finance Ministers meeting this upcoming weekend, traders are exhibiting reluctance in committing to any particular direction.
The dollar however, was initially softer on a delayed response to PBOC Governor Zhou’s comments, in which he said China already possesses enough foreign exchange reserves. His comment can be interpreted as China not needing to further purchase dollars for its fx reserves. Zhou also added that the yuan was currently in the process of strengthening and moving toward greater flexibility in its currency regime. Yuan revaluation will no doubt be a topic of discussion at the G7 FinMin meeting, as will other Asian currencies with history of artificially weak exchange rates. The key will be how the G7 addresses the issue in its communiqué and whether it strongly condemns currency manipulation.
Meanwhile, St Louis Fed President Poole provided little fresh clues on upcoming monetary policy, but did say that it needs to be as tight as it needs to be and would rather act earlier than later if inflation does not diminish. He said that although monetary policy could not create jobs in the long-run, policy mistakes could result in painful unemployment – highlighting fears of overshooting. Poole added that future Fed policy is going to depend on surprises that cannot be predicted and that upcoming data could push the Fed to either a hike or to lower rates. Markets will look ahead to this week’s US CPI data on Friday and gauge whether the FOMC will continue to leave rates unchanged at its upcoming meeting next Wednesday.
The dollar however, was initially softer on a delayed response to PBOC Governor Zhou’s comments, in which he said China already possesses enough foreign exchange reserves. His comment can be interpreted as China not needing to further purchase dollars for its fx reserves. Zhou also added that the yuan was currently in the process of strengthening and moving toward greater flexibility in its currency regime. Yuan revaluation will no doubt be a topic of discussion at the G7 FinMin meeting, as will other Asian currencies with history of artificially weak exchange rates. The key will be how the G7 addresses the issue in its communiqué and whether it strongly condemns currency manipulation.
Meanwhile, St Louis Fed President Poole provided little fresh clues on upcoming monetary policy, but did say that it needs to be as tight as it needs to be and would rather act earlier than later if inflation does not diminish. He said that although monetary policy could not create jobs in the long-run, policy mistakes could result in painful unemployment – highlighting fears of overshooting. Poole added that future Fed policy is going to depend on surprises that cannot be predicted and that upcoming data could push the Fed to either a hike or to lower rates. Markets will look ahead to this week’s US CPI data on Friday and gauge whether the FOMC will continue to leave rates unchanged at its upcoming meeting next Wednesday.
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