The Forex Daily Digest – July 6, 2009

Holidays are over and it’s time to get back to business. The equities are showing some weakness today as global investors concern themselves with the shape of corporate earnings in the second half. Also, investors seem to be less enthusiastic to hold certain assets which are creating a modest refuge of support for the USD.

The USD traded within thin ranges against major currency counterparts, advancing on the euro but losing a bit to the yen. Normally, the JPY also benefits from rising levels of risk aversion. Global currency traders taking their positions ahead of this week’s meeting of leaders of the Group of Eight nations in Italy are also seen supporting the dollar.

Expectations are that the Bank of England will decide that a further increase of 25 billion pounds to its quantitative-easing program is required when BOE policy makers end their monthly meeting this week. They are being blamed for the recent weakness in sterling. Speculation is also circulating that the BOE could announce it will look for approval from the Treasury to boost the size of the program even further.

Russia President Dmitry Medvedev told European media sources that the present dollar-based reserve system is defective but at the present time "there is no alternative to the USD or the European currency." Medvedev is scheduled to meet today with President Obama as he travels to Moscow ahead of the three-day G8 summit, which begins on Wednesday.

The rhetoric surrounding the dollar's international status comes as leaders of the world's biggest economies prepare to meet in Italy. The leaders of Canada, France, Germany, Italy, Japan, Russia, Great Britain and the United States will gather in L'Aquila. Representatives from China, India, Brazil, Mexico, South Africa and Egypt will also be present at the meeting.

The European Commission President, Jose Manuel Barroso, said today that “strong, stable currencies are important at a global level for economic stability.” He said that the most significant issue is not to be for or against the dollar, “but to have a number of important currencies that give stability to the world financial order." Barroso said he is happy about the euro's credibility over the past few years.

Meantime, the French Finance Minister and the Governor of the Bank of France are asking for increased global synchronization of currencies, joining a debate supported by emerging markets from China to Russia. The comments may signal that France believes that the emerging economies have the right to more input in the methods of how the world economy operates.

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