Forex Investment and Currency Trading

The G8 meeting in Italy this week is likely to be watched for any comments on the role of the USD as a reserve currency. There have been more comments from Chinese and Indian officials on this issue over the past few days, and the French Economy Minister has called for better co-ordination on FX. The latter comment does not necessarily have USD-negative connotations - “co-ordination” seems to reflect more a desire for stability rather than an abandonment of the USD as a dominant reserve currency. In addition, euro area officials probably see more downside from reserves diversification, at least for now, as a stronger euro would tighten monetary conditions when the economy is still very weak.

Market does not expect serious concerns to be raised about the USD at this meeting - moderate strength is likely to be viewed as being in the global interest in terms of keeping long-term rates down and relieving what may emerge as commodity price pressures on inflation down the road. However, while it may be too early to sell USD, the fact that the discussion has become so public suggests that USD weakness would accompany a global recovery as confidence is restored in the medium and long term.