Dollar Slumps Post G20

The US dollar is broadly weaker in the wake of the G20 statement that appeared to encourage flowing in emerging markets and risk assets in general. Leading the move is the Australian dollar and Swedish krona. The larger than expected rise in Q3 PPI (1.3% vs 0.5% consensus) and hawkish comments from RBA Governor Stevens, coupled with anticipation of M&A-related flows (Singapore SGX to buy Australia’s ASX for A$8.4 bln) helped lift the Australian dollar to near parity (~$0.9973).

Expectations that Sweden’s Riksbank will follow through with it recent hawkish signals and raise rate later this week has underpinned the krona. The euro is trying to establish a foothold above $1.40. Although it traded around there for the better part fo the past three weeks, only in one session (Oct 14) has it managed to finish the NY session above there.

The dollar’s broad weakness conceals sterling’s weakness, which is evident on the crosses. Meanwhile the G20 pledge to avoid competitive devaluations has seen the yen strengthen and the JPY80 psychological level draws near.

The G20 meeting kicked the can down the road. Countries pledged to avoid competitive devaluations, but it is not clear what this really means in a period in which nearly all the emerging market currencies are appreciating. Surely the pledge does not pose an obstacle to the Federal Reserve’s QEII plans, even though the German Economic Minister was unusually pointed—that the excessive money supply growth implied by quantitative easing was an indirect manipulation of the foreign exchange market. The US attempt to turn the current account imbalance story, which has long been used to criticize it, into a new point of leverage on China was diluted with no agreement on quantitative targets.

US Treasury Secretary Geithner reportedly made an unscheduled trip to China and opined China would continue to allow the yuan to appreciate. It is not clear that this will be off sufficient magnitude to deter Senator Schumer from taking up the bill aimed at the CNY after next week’s election. Speculation from a large US investment house that the Federal Reserve’s bond purchases could be as much as $2 trillion, though $4 trillion is what may truly be needed, is not doing the dollar any favors. Reports that the St. Louis Fed President Bullard (voting member) suggested that $250 bln purchases between meetings was being discussed, is more in line with our thinking.