There is a good Bloomberg story that wraps it up: President Barack Obama's effort to lead the world economic recovery by spending the US out of its recession is undermining the dollar, triggering record commodities rallies as investors scour the globe for hard assets. As threats of a financial meltdown fade, the currency is falling victim to an unprecedented budget deficit, near-zero interest rates and slow growth.
The dollar is down 10 per cent against six trading partners' legal tender in Treasury Secretary Timothy Geithner's first eight-and-a-half months, the sharpest drop for a new occupant of that office since the Reagan administration's James Baker persuaded world leaders to boost the Deutschemark and yen by debasing the dollar in 1985.
Faced with the collapse of the dollar, many Asian central banks intervened on the foreign exchange market on October 8. Some bought dollars to halt the rise of their own currencies, while others to defend the fixed link which binds their currencies to the greenback.
Destabilised by the falling dollar and pressure from capital inflows seeking to profit from future economic recovery in the region, the Asian currencies soared, thereby endangering the return to growth. South Korea, Indonesia, Thailand and Hong Kong intervened urgently last Thursday. The Hong Kong monetary authorities injected 16.26 billion HK dollars (€1.42 billion). Indonesia has said its goal was to reduce the "volatility" of the rupee and it had no target for its currency.
The Philippine Central Bank said Friday that it would see that its currency increases at a slower pace and did not rule out the possibility of an intervention. Taiwan would seek to establish a system of capital controls to try to stem the rise of its currency. These movements show the growing concern of the entire planet against the fall of the dollar, and with the phenomenon of soaring commodities, especially gold.
The Asian currencies are not the only ones concerned. The fall in the greenback has led to the rise for several months of the currencies of New Zealand, Australia and Canada, but also the euro. The finance ministers of Canada and New Zealand voiced their concerns last Thursday about the rise of their currencies.
Speaking from Venice after the monthly monetary policy meeting of the European Central Bank, President Jean-Claude Trichet, who has not changed his diagnosis on the economy of the eurozone, said it was "extremely important in the current circumstances" that the United States continue to show their desire for a strong dollar.
"Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability," he added, resuming the usual rhetoric of the G7 countries. A stand "shared both sides of the Atlantic" and we are ready to "cooperate as appropriate", Mr Trichet said.
But most stakeholders await the first wave of quarterly publications this week across the Atlantic, and hope to have new evidence of the recovery of the world's largest economy. The company forecasts for the rest of the year will also be heavily scrutinised.
Pressure increased last week on "Uncle Sam's" currency following rumours of abandoning the US dollar as the reference currency and since the Australian Central Bank raised interest rates last week, becoming the first country in the G20 to do so since the beginning of the crisis.
Fed Chairman Ben Bernanke calmed the waters on their side, indicating that the US Central Bank was ready to raise rates when economic prospects have "sufficiently recovered". This does not yet seem to be the case, as Mr Bernanke said he expected to "conduct an accommodative monetary policy for a long time".
"At one point, however, when the economic recovery progresses, we will tighten our monetary policy to prevent the emergence of an inflation problem," continued Mr Bernanke.
Upcoming FX Key events
In the US, the Fed minutes due this week will be closely watched as markets seek clarity on the Fed's current position on exit strategies. On the data front, retail sales will be released and the market is looking for a softer print. CPI is expected to rise slightly higher, while core CPI is expected to stay flat. On the output front, the Empire State Manufacturing Survey will be out and the University of Michigan index is expected to remain flat. Fed's Kohn, Dudley and Bullard will also be speaking. In England, inflation numbers and labour market data dominate this week.
FX Technical Key points
EUR/USD is bearish, target 1.4420, key reversal point 1.4850
USD/JPY bearish, target 87.10, key reversal point 91.70
GBP/USD is bearish, target 1.5050, key reversal point 1.6200
USD/CHF is bearish, target 1.0150, key reversal point 1.0550
AUD/USD is bullish, target 0.9850, key reversal point 0.8750
NZD/USD is bullish, target 0.8200, key reversal point 0.7170.
Mr Longchamp is head of trading at RTFX Ltd.
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