Currency traders keep a sharp eye on what the Group of Seven says.
These central bankers from the leading economies of the world carry some powerful clout when they all pull together.
Well, these guys met again over this past weekend and it’s going to have some notable affects upon currencies around the world…mostly in the yen, dollar and euro.
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For instance, in the meeting Japan’s new Finance Minister Jun Azumi said, “We will continue to closely monitor developments and we will take bold actions, especially against speculative trading.”
He seemed to have the backing of his G-7 peers on this since no one objected. Some have even said that the G-7 could join the Bank of Japan in intervening in the yen again by selling yen and buying dollars.
Therefore this poses huge risks to any trader that wants to be a buyer of the yen right now.
You’ll also remember that recently the Swiss National Bank intervened in the Swiss franc as they sold francs and bought euros and other currencies.
So this puts two of the “defensive currencies” in a higher risk zone as far as currency traders are concerned because they both happen to carry “intervention risks” now. And you don’t want to be on the wrong side of the market when these guys go in with both guns blazing.
Therefore, this puts the greenback in the top spot as the “least meddled with defensive currency” to turn to now. So by the recent actions in the franc and the rhetoric surrounding the yen…more investors will now run to the buck as stocks fall and investors defend their wealth by avoiding riskier assets and run to the defensive dollar.
How long will the dollar get a bump higher? The answer…for as long as stocks continue to slump. I envision this lasting for at least some months if not longer.
Now…the final shake-up that’s going on in the currency market due to the G-7 is what is happening concerning the euro.
Treasury Secretary Geithner told his European counterparts that they’d better “get their act together”. In the same meeting, Canada’s Finance Minister Flaherty told the rest of the G-7 that Greece may need to exit the euro.
Then add to this the fact that ECB’s Stark decided to quit the ECB’s executive board over some disagreements…and you have plenty of reason to sell the euro with all of the negative sentiment coming from these G-7 and ECB leaders.
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And when money flows out of the euro…one of the first places it runs to is the U.S. dollar. The reason for this is because the dollar and the euro have the greatest pools of liquidity and it’s the easiest place for money to move to. So when money isn’t in one…a good portion of that money is moving to the other.
Therefore, the dollar will benefit from a lot of the negative sentiment going on in the Eurozone right now.
So where does all of this leave things?
It causes the greenback to be the best defensive choice for money to run to. It causes the yen and franc to become less attractive places to run now because of the hurdles associated with intervention risks.
The euro will head lower because each passing day shows that it’s becoming more evident that things are unraveling in the Eurozone right now. And that’s not good for their currency, the euro.
Therefore, I believe we will see EUR/USD head towards 1.30 (maybe lower) as all of this continues to come to a head over the coming weeks/months.
So if there’s one thing you can thank these G-7 officials for…it’s for giving insights into where currencies are going to head to in the weeks and months ahead.
About the Author: Sean Hyman
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