Monday April 24, 2006 - 10:48:45 GMT
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INVESTICA Ltd - www.investica.co.uk
G7 pressure on dollar
The yen strengthened during Friday ahead of the G7 meetings and the Japanese currency gains accelerated after the G7 meetings with lows around 115.30 against the dollar before a recovery back to 115.70. There was some evidence of dollar buying by importers and domestic institutions close to the 115.0 level, but the dollar temporarily weakened to below 115.0 in early Europe on Monday.
G7 officials stated that flexibility in currencies was desirable to make the necessary adjustments in global trade imbalances. In effect, this was a clear call for a strong Chinese currency and for currency appreciation in Asia as a whole. Chinese officials have rejected a major policy move although central bank governor Zhou stated that the rate of yuan appreciation could increase slightly.
Asian officials will remain acutely aware of currency levels and there will be Asian intervention to stem heavy gains for Asian currencies which will help limit near-term dollar losses. The Japanese Finance Ministry has denied reports that it is now more willing to let the yen appreciate and the Ministry has stated that its intervention policies are unchanged. There is a greater risk that the markets will test official tolerance of yen gains and verbal warnings over yen strength is likely below the 115.0 level, although actual intervention is unlikely above the 110.0 level.
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