[ForexNews]

G7 were in a bit of a dilemma heading into the meeting. If they did not mention currencies, it would be viewed as perhaps indicating that they were throwing in the towel on preventing USD weakness. And a strengthening the comment would likely have led to the question of what they were willing to do. So they maintained the prior comment on the need for China to appreciate, which in the absence of China around the table, had little content.

ECB President Trichet was more explicit this morning in calling for EM currencies to appreciate against both the EUR and USD, and that such appreciation does not "...at all imply a change in the bilateral position of the dollar and the euro..." Trichet comments were a little more explicit rather than unusual in lobbying for no euro strength, but were solidly in the G7 mainstream of pointing a finger at China, rather than at the US. US Treasury Secretary Geithner was not entirely convincing when he said "“it is very important to the United States that we continue to have a strong dollar,” but would not explain how that was compatible with the adjustment in imbalances. The word "continue" in his comment is also open to interpretation as many USD holders would not characterize the current USD move as one they would like to continue.

Canadian Finance Minister Flaherty said “There’s clearly upward pressure on the Canadian dollar and we will have to deal with that over time ...We would like to see an orderly adjustment.” This is consistent with the view that Canadian options for slowing the CAD rise are limited now. Japanese Finance Minister Fujii seemed to unwind some of his yen hawkishness with: “If currencies show some excessive moves in a biased direction, we will take action.”

Central Bank USD no-buy zone
A consequence of increasing flows into emerging markets is that global reserves are likely to continue rising, generating downward pressure on the USD against other G10 currencies owing to rebalancing (and perhaps some diversification) flows. Last week, the IMF published its latest COFER data for Q2, which show that central banks are increasingly reluctant to accumulate dollars. EM central banks appear much more aggressive than in the past in shifting out of the USD into other G10 currencies. This makes it likely that USD pressures will continue to mount as increasingly buyers of last resort become reticent buyers.