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G7 will not try to stabilise USD

Fri, Oct 19 2007, 14:45 GMT
by Danske Research Team

Danske Bank A/S

USD is still under pressure, but this is unlikely to be a major issue at the G7 meeting on 19-21 October in Washington. First, because the Europeans have failed to form a common front and, secondly, because the IMF has stated ahead of the meeting that it still views USD as overvalued and hence has pre-emptively deflated any arguments for a stabilisation. The IMF declaration on currencies will likely very much resemble April’s declaration, when neither USD, nor EUR, nor JPY were directly mentioned. Like most recent G7 meetings, the upcoming one appears destined to be undramatic. As can be seen in the figure top-right, there have been no significant reactions in EUR/USD in the days following the past three G7 summits, and movements in the two weeks after the meetings have been less than 1%.

China was the only villain highlighted in the G7 declaration of April 2007, and a sharpening of the G7’s tone here cannot be ruled out. China’s policy of gradually strengthening CNY against USD has not produced much of a result - at best it has ensured that CNY has not become further undervalued. At present, we estimate CNY to be undervalued by 17%-34% (see figure), which is roughly the same as when China commenced this policy in July 2005.

As the de-coupling of the business cycles in China and the US and the weakening of USD continue, it will be-come less and less likely that China’s semi-peg to USD can - alone - produce the desired results. Hence there may be a need for some new thinking when the new Chinese leadership convenes after the party congress winds up next week.

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Published on  Fri, Oct 19 2007, 14:45 GMT