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Dollar’s burden shifts to the Fed

G8 meeting provides no support for greenback, switching focus to FOMC

By Laura Mandaro, MarketWatch

Last Update: 6/16/2008 5:53:00 PM

SAN FRANCISCO (MarketWatch) — With global policy-makers failing to signal
support for the beaten-down dollar over the weekend, the greenback’s ability to
continue on a firmer path now rests with the Federal Reserve’s determination to
fight inflation with higher interest rates.

“At the moment it’s still down to the U.S. and the Fed to keep on talking
hawkishly and keep talking the dollar up,” said Ian Stannard, senior currency
strategist at BNP Paribas in London.

The market is now looking toward the Fed’s interest-rate setting meeting on June
24-25 for a better sense of when the U.S. central bank will start raising rates,
he and others said.

“If Fed Chairman Ben Bernanke doesn’t follow through with a rate hike at some
point, which we think it will be hard to do, that could be a problem for the
dollar,” said Robert Lynch, currency strategist at HSBC in New York.

On Monday the dollar gave up some of the past week’s gains as traders reacted to
a Saturday statement by Group of Eight finance ministers that was notable for
what it didn’t mention: anything about currencies or foreign exchange rates.

Instead, policymakers from major industrialized nations including the U.S.,
Germany and Japan, stressed their worries that surging oil and food prices would
derail global growth and increase inflationary pressures worldwide.

High commodities prices “pose a serious challenge to stable growth worldwide,”
said the ministers’ statement, which marked the end of their two-day meeting in
Osaka, Japan. See story on G8 meeting.
Click for Detail

A weak U.S. currency tends to boost the price of dollar-denominated commodities,
such as crude oil, as it makes them cheaper for holders of other currencies.

Accelerating inflation is also closely tied to the relative value of currencies
since the threat of run-away price growth often pressures central banks to
increase interest rates. Higher rates make a country’s currency more attractive
as a holder of value.

But currency markets were queued up for G8 comments that dealt specifically with
the weak dollar, not just the more generalized threat of inflation. The notion
that the U.S. and its trading partners might physically intervene in the currency
markets, say by buying dollars, has been gaining ground thanks to recent
policymakers’ comments.

“If they had specifically mentioned the dollar, that would have provided the
dollar with a lot of support, alerted the market to direct action in the currency
markets,” BNP’s Stannard said.

Though actual intervention in the currency markets is rare - the last time the
developed economies used their massive foreign exchange reserves to help a
currency was in 2000 - recent statements by U.S. and European policymakers have
bolstered the idea of intervention.

Lots of talk…

Earlier this month, Bernanke warned the dollar’s weakness was contributing to
inflation. The statement was unusual because the U.S. central bank typically does
not comment about the dollar, instead leaving currency policy in the hands of the
Treasury Department. The Fed chief’s defense prompted a sharp rally in the
dollar. See earlier story.
Click for Detail

Compounding the sense that policymakers were moving closer to a physical
intervention, U.S. Secretary Henry Paulson last week twice said the U.S. would
never take the option of currency intervention off the table. These comments
followed May reports, citing unnamed U.S. and European officials, that central
bankers had moved closer to supporting the dollar at April’s G7 meeting.

The recent round of verbal intervention helped the dollar rally 2.5% against the
euro last week, according to FactSet Research, for the greenback’s best weekly
gain in years. The dollar has gained more than 3% from a record low reached April
22. See currencies report.
Click for Detail

On Monday the dollar gave up some of the gains, floundering 0.5% against the
euro. The N.Y. dollar index, which measures the buck against six major
currencies, fell 0.5% , helping to initially boost the price of oil to near $140
a barrel and buoying grains prices. See oil report
Click for Detailand
see food futures report
Click for Detail

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