Forex Update: Comparatively Reliable U.S. Dollar, Falling British Pound, And Geithner's Message to Asia

Currency market participants are faced with increasingly diverse options amid the deepening erosion of risk appetite, persistent banking losses and deteriorating measures of corporate and household wealth. While yen-supportive strategies remain most prevalent amid the worsening risk-landscape, broad selling of the British pound and bearish stances in the commodity currencies (CAD, AUD and NZD) has also proven rewarding. The US dollar continues to emerge as a reliable companion to the yen in strengthening by default against the European and commodity currencies. USD-strength by default simply means the increase in value resulting from a slew of negative European issues (UK banking troubles and S&P sovereign downgrades of Eurozone nations). But as I have argued last week, gold's upward trajectory manifests the ongoing fundamental woes in the US economy and currency (last weeks retail sales, falling CPI and todays soaring jobless claims). As retail investors realize gold's ability to hold above its 2-month trend line, their new zeal for the metal via ETFs may help propel the metal back to December's $890s.

Sterling Focus: From Davos to Rome

As French and German officials begin to express concern with the impact of the pound's rapid fall on their already sluggish economies, more swings are expected in the British currency, particularly, the parity-bound EURGBP exchange rate. Chatter is already circulating about a possible mention of the weak GBP in next month's G7 meeting in Rome. Over the last 6 years, G7 summits were a popular venue for policy makers to voice their concerns over a plummeting dollar, an artificially low Chinese yuan or Japanese yen. But with the current GBP plunge already dubbed as a currency crisis (23-year lows vs the USD and record lows vs EUR and JPY), the focus has clearly shifted and the stakes are higher. Consequently, we should expect more GBP volatility ahead of the G7 meeting, especially as the chorus of remarks from German and French officials about GBP intensifies. Currency swings will be especially pronounced as German and French tensions may be further countered by the approving from UK Treasury officials. After all, the weak pound is the only silver lining of the UK recession.

source : seekingalpha.com