The falling dollar's strong grip on financial markets has inflated market expectations for the weekend G-20 finance ministers meeting in Korea, but the gathering is unlikely to end with little more than a few loose promises.
It will also not resolve the biggest issue on the table - the dispute between the U.S. and China on China's unwillingness to let its currency appreciate.
Analysts expect a statement from the finance ministers and central bankers, who meet Friday and Saturday ahead of the G-20 heads of state meeting in November. The group is also expected to tackle banking reform, but the drama in currency markets has overshadowed that part of the meeting.
Brian Dolan of Forex.com said the ministers' statement Saturday is expected to say countries should avoid a round of competitive devaluations. "After the meeting is over, these individual countries will continue their efforts to manipulate their currencies," said Dolan.
The falling dollar has exacerbated the divide between the world's developed and emerging nations, which have seen their currencies rise in tandem with the dollar's decline. Brazil, for one, has attempted to stem the real's rise by taxing foreign investment. The dollar edged slightly higher Thursday against the euro, reversing an earlier move that took the euro over the $1.40 level. The dollar was also slightly higher against the yen.
"Ultimately everybody is united in wanting to see the Chinese allow their currencies to strengthen further. Obviously, it is undercutting their competitiveness in Asia with the Chinese maintaining the weak yuan. One of the reasons the currencies are appreciating is because the money can't go into China, so it's going on the path of the least resistance — into other emerging Asian economies. Brazil is the Latin American version of that," said Dolan. Brazil's finance minister Guido Mantega, who recently declared the world in a "currency war," is not attending the meeting.
During the past week, U.S. Treasury Secretary Tim Geithner has made more comments about the dollar than he's made in months. In a Wall Street Journal interview in Thursday's paper, Geithner said the major currencies (euro and yen) are "roughly in alignment now," and that the U.S. will pursue an approach that would encourage China and other countries to let their exchange rates appreciate. Geithner also said earlier in the week that theU.S. goal is not to devalue the dollar.
"He is basically saying the U.S. will not use the dollar like a weapon..We're going to use policy that's in our interest, but if the dollar falls so be it. We are not targeting the dollar, and the dollar does not need to fall against the major currencies. He seems to be targeting the problem towards China," said Marc Chandler, chief currency strategist with Brown Brothers Harriman. Chandler said Geithner, by commenting on the euro and yen, is also articulating a position for G-7 countries, who meet Friday ahead of the larger G-20 gathering.
"I think China resists them ganging up on them...I think it's sort of like Don Quixote going after the windmills. I don't think that's really where the problem is. I think it's a marginal factor," Chandler said of the Chinese currency. "The problem is they're a younger population than the U.S. and they're growing faster. Where they are in their development is they're basically saving a lot of money, and I think what they want to do is avoid some of the excesses."
Chinese officials have said their currency is not the problem, and that the U.S. needs to control its deficits. The U.S. contends that by keeping its currency low, China artificially cheapens prices for its good, crowding out others in world markets. Geithner also said the finance ministers are going to try to pursue efforts toward a "rebalance" of the world economy so it is less reliant on U.S. consumers for growth.
UBS senior economic adviser George Magnus believes China should move on its currency, and it should do so sooner rather than later because the adjustment will get increasingly difficult. "There has to be an almost Breton Woods kind of thing, acknowledging the global system is worth saving but not only the debtors have a responsibility to put their house in order, but that creditors have obligations too...I don't think its going to happen, at least not voluntarily," he said.
China this past week raised interest rates for the first time since the financial crisis began. "It's happened before and I think it was tactically astute for China to take the sting out of the issue, especially before big meetings like G-20, so it doesn't get attacked," said Magnus, the author of an upcoming book on China.
Chandler said there were market rumors that Geithner is seeking a very specific 3 percent move in the yuan before the November G-20 meeting, and that he is pushing for another 3 percent move between November and January. China recently has let its currency rise very slightly, but less than 3 percent, against the dollar since early September.
"There will be a statement this weekend. The communiqué will paper over some differences, but only the heads of state can engineer peace," said Chandler, adding more will be resolved at the November meeting.
Chandler said the dollar may actually be getting ready to break its downtrend, but that won't likely happen before the U.S. mid-term election Nov. 2 and the Fed's meeting Nov. 3, where it is expected to announce further easing. "The last four or five days was very choppy. I really thought the 1.40 level in the euro was going to be the top," said Chandler. The euro has made several recent runs to 1.40 but then backed away each time.
"Short-term momentum players, hedge funds have models that would still be selling the dollar, but it's getting close to New Year's eve at the party. I think we have two more weeks. I think this week showed us how hard the dollar can reverse," he said.
The Fed is expected to announce Nov. 3 that it will restart a program to buy Treasury securities, an event highly anticipated by the markets. The steep decline in the dollar, and coinciding rise in risk assets, like stocks and commodities, was triggered when the Fed began discussing so-called quantitative easing in late August.
"The Chinese have a good way of putting it. All thunder, no rain," said Chandler, noting just the whiff of easing has helped encourage the intended result in markets. "The key figures (Fed Chairman Ben) Bernanke and (New York Fed President William) Dudley have made very clear about the need to have more easing. If they do not ease now, it will be more destabilizing for the market than if they do this quantitative easing."
What Else to Watch
Besides G-20, traders are watching earnings Friday. Just a few major reports are expected from Nestle, Honeywell, Verizon, Ingersoll-Rand,Exelon, Schlumberger and KeyCorp.
Traders are also watching to see if the Dow will make another run at its April closing high of 11,205. It hit that level Thursday before backing down. "It made it to 11,210 and tested those previous highs and then failed," said Dolan, adding the stock market's retreat coincided with the turn higher in the dollar.
The Dow finished 38 points higher at 11,146, and the S&P 500 was up 2 at 1180. Treasurys declined, and the yield on the 10-year rose to 2.534 percent.
Consumer discretionary stocks were the best performers, up 0.8, followed by industrials, both global growth plays. Defensive utilities and telecom were the worst performers. Financials were down 0.2 percent, and Bank of America was a biggest loser on worries it will have a bigger hit from mortgage liabilities and speculation there was a big seller in the stock.
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