With G7 finance ministers coming together for the IMF and World Bank meetings in Istanbul, Turkey, Oct. 4-7, you can call it coincidence or not, but it now definitively looks like the verbal dollar support from the Europeans, Canadian, Japanese, and others has come back to life, once again.
Speaking before the European Parliament's Economic and Monetary Affairs Committee on Monday, ECB President Jean-Claude Trichet said: “. . . in the present situation it is extremely important that we can have. . . a strong dollar. . . The solidity of the dollar is very important.”
On Tuesday, European Central Bank Governing Council member Ewald Nowotny said: "Of course I agree with my president (in support of strong dollar), there has always been an interest both from the side of the euro zone and the side of the United States. . . we have a shared interest in avoiding wide (FX market) fluctuations."
From the political side, Prime Minister Jean-Claude Juencker of Luxembourg, chairman of the group of 16 European Union countries that have joined the euro, said before the European Parliament's Economic and Monetary Affairs Committee that in the past, the U.S. government has insisted on a strong dollar, saying it is in the interest of U.S. economy.
Juencker added that this statement hadn't been heard in a while, but that "we would like to hear it again" in the coming days.
On the other side of the Atlantic, Bank of Canada Governor Mark Carney said in a written speech to the Greater Victoria Chamber of Commerce in British Columbia: "Other things being equal, a persistently strong Canadian dollar would reduce real growth and delay the return of inflation to target. . . Canada's terms of trade could improve further. . . the possibility of persistent strength in the Canadian dollar would work against the positive factors just mentioned."
And Wednesday, in Japan, Toyoo Gyohten, the new key adviser to Finance Minister Hirohisa Fujii said: “There’s no better alternative to the dollar. . . Making it as stable as possible would be the best policy option at the moment.”
So, it hasn’t taken long before the new Japanese government clears all misunderstandings.
Gyohten’s comments suggest the Democratic Party of Japan, which came to power for the first time this month, may toe the policy line of the former government of supporting the dollar’s hegemony and will continue buying U.S. Treasuries.
Remember in June, Japan’s former Finance Minister Kaoru Yosano said that the dollar’s position as the world’s reserve currency “isn’t under threat.”
Japan is the second biggest foreign holder of U.S. Treasuries with $724.5 billion in July. All this being the case, then, caution would be advised to investors in pursuing an overly bearish near-term stance on the dollar.
Nevertheless I would also like to add that the Dollar Index has risen from its recent 75.83 low on Sept. 23, and it has yet to trace out a clear impulse pattern.
In my opinion I think it will, but until then I’m obliged to remain a cautious near-term dollar bull.
Remember, there still remains, technically speaking, a very strong support around the 74.50 level, and a move down to this area can’t be ruled out.
As long as the Sept. 23 low of 75.83 remains intact, the Dollar Index’s only way is up. That could really surprise a lot of investors who are still extremely bearish on the dollar. So, we’ll see what happens.
Investors should also take into account that on Sept. 30, Japan’s first half of the fiscal year ends, and it is the last day Japanese exporters can take advantage of an April 1 rule that waives taxes on repatriated profits.
This is very important because under a previous law, companies had to pay a combined 40 percent tax on overseas earnings.
This yen stimulus will be removed on Oct. 1. That’s certainly not a fundamental negative for the dollar.
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