EUR USD (1.4655) China must be aware of the economic and political risks of excessive US dollar holdings, the China Finance 40 Forum reported yesterday. The warning was issued by a senior official at the State Administration of Foreign Exchange. Guan Tao suggested that, given the Fed’s expansionary monetary policy, the US may find it difficult to resist the temptation of devaluing the dollar and pushing up domestic inflation. Curiously enough for Mr Guan, the publishing of the personal opinion had a predictably negative effect on the SAFE’s own investment book, as the dollar edged down following his admission. For his part, Fed Chairman Bernanke told the International Monetary Conference that the dollar’s decline is due to slow growth and the trade deficit and that commodity prices depressed the dollar, not viceversa. Meanwhile, the prospect of QE3 appears to have been swept from the table. Atlanta Fed President Dennis Lockhart said yesterday that his current forecast for the US economy doesn’t warrant any further easing. However, as Bernanke sees commodity price inflation as transitory, one must assume that the Fed sees the current high rate of US joblessness as transitory too.
Wolfgang Schäuble apparently deterred the euro’s trek northward yesterday. In a leaked letter to the ECB, the German finance minister favoured the restructuring of Greek debt. However, the euro still has the chance to attain 1.4775, even though we cancelled our dip-buying strategy for risk-reward reasons. Critical support moved up to 1.4510.
Market Bias Index
The Market Bias Index changed only slightly from the previous day, and the Swiss franc is still perceived as the most overvalued currency of all the majors.
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Deutsche Bank
Fixed Income Research – Global