The Fed, the Treasury, and the G7 may have discovered that the U.S. peso (a.k.a. “the dollar”) has been falling and world inflation is rising. According to the official statement of the G7 finance ministers and central bank governors: “since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate.”
Okay, so the big boys are finally focused on the sinking greenback and the resulting worldwide inflation pressure. But what are they going to do about it? My sources tell me that the G7 is not yet ready to put their money where their mouth is. In other words, no dollar-buying — at least not yet.
The statement itself (which is more aggressive than recent statements on currencies) is intended as a warning to global currency traders to stop their non-stop dollar shorting. The dollar index is off nearly 1 percent this morning. Traders may be testing the Treasury and the G7 with more dollar sales. Treasury sources tell me that European Central Bank head Jean-Claude Trichet is not ready to help with a dollar-support operation. And with the euro target rate at 4 percent, compared to the Fed’s 2.25 percent, the Treasury believes it will be tough to support the dollar at this point.
If the Fed does not lower its target rate at the next Fed meeting on April 30, that would signal dollar-support. But money markets are still pricing in two more quarter-point rate cuts by the Fed. So I think the G7 currency statement could be viewed as a first step to a dollar-stabilization action, but it’s still very iffy to conclude anything else.
