On Friday afternoon, Vice President Dick Cheney’s Chief of Staff, Scooter Libby, was officially indicted for the role he played in exposing the identity of an undercover CIA agent. While Libby immediately resigned his post in order to shield the Bush administration from further embarrassment, sufficient damage had already been dealt to the integrity of the administration. Nonetheless, forex markets reacted favorably to the news, sending the USD upwards. It seems currency traders were excited that the Vice President himself was spared, and they evidently felt the impact on the US economy would be negligible. However, if additional indictments are handed down in the next few days, expect the USD to reverse course. Reuters UK reports:

“There is still an element of doubt on whether there could be more charges of other White House officials…For the dollar it was the best outcome with just the one indictment of Libby,” said chief currency strategist at Scotia Capital.

Read More: Dollar rallies on strong US GDP, Libby indictment

Earlier this week, President George Bush nominated Benjamin Bernanke, currently Chairman of Bush’s Council of Economic Advisors, to replace Alan Greenspan as Chairman of the Federal Reserve Bank. Many analysts have since weighed in on the nomination, speculating as to how Bernanke will conduct monetary policy. Bernanke’s economic ideology is Keynesian, which purports to use government spending and tax cuts to stimulate economic growth. By analogy, Bernanke could conceivably conduct monetary policy with the goal of achieving economic growth at any cost, even if it means maintaining interest rates that are artificially low.

The implication for currency traders is clear. If Bernanke devotes the bulk of his efforts to economic growth rather than fighting inflation, he will be reluctant to raise interest rates. The law of interest rate parity states investors must be compensated for holding the currencies of nations with high rates of inflation. Thus, if Bernanke fails to control inflation as Alan Greenspan did, the USD will suffer in the long run.

“While equities markets may welcome such a ‘stimulative’ mindset, currency markets will likely treat Bernanke with great suspicion, particularly with regard to the U.S. dollar.”

Read More: Bernanke faces reputation as inflation ‘dove’

According to recent GDP data, South Korea’s economy grew by 4.4% in the last quarter, which officially became the most productive in over two years. Economists attribute the sudden increase in growth (from 3.3% to 4.4%) to soaring demand. While South Korea’s economy has traditionally been driven by exports, figures from the latest quarter indicate domestic consumption is also making an impact, as hitherto frugal consumers dip into savings. Analysts are already speculating the Central Bank of Korea will further tighten monetary policy by raising interest rates next month, which should lend additional support to the Korean Won on top of the positive GDP data. The Financial Times reports:

“The Economy is staging a steady recovery after hitting bottom in the first quarter. The upward trend is likely to continue towards the end of this year, which raises the prospect of another rate hike,” said [a Korean economist].

Read More: Demand Drives S Korean Growth

By definition, a nation’s currency should move in proportion to its current account balance. More specifically, when a nation experiences a current account deficit, almost implicitly, more money is leaving the country than is coming in. Why, then, has the USD risen over the last year while its current account deficit has ballooned? Economists have varied explanations. First, while foreigners are selling more than they are buying from America, they are also investing more in America than they are in their home countries. For example, while Asian Central Banks have markedly slowed their buying of American treasury securities, they nonetheless have continued to buy. Likewise, oil exporting countries have reinvested the profits gained from higher oil prices back into American corporate and government debt.

Next, while a current account deficit is usually associated with economic underperformance, in the current case of the US, the opposite is in fact true. Despite its soaring twin deficits and high interest rates, the US economy continues to outperform. Finally, a growing interest rate differential between the US and other developing countries is inducing risk-averse investors to shift capital into US securities. The foreign exchange transactions required to complete such investments have buoyed the USD.

Read More: Every which way but down

Since its rapid appreciation last summer, the USD has remain virtually locked to the Euro and Yen, and fundamental analysts are having a difficult time extracting profits. Unfortunately, barring any unforeseen developments, the USD is likely to remain range-bound in the near-term, lament currency traders. Changes in short-term interest rates and economic data will continue to induce day-to-day fluctuations, but will likely fail to provide impetus for the USD to break out of its tight range. The silver lining is that widening interest rate differentials and optimistic economic forecasts provide a certain amount of downside protection for the Dollar. Therefore, if the USD does break out, it will most likely be an upside move. The Wall Street Journal reports:

“For the dollar to slip you would need the market focus to shift off interest rates, which is possible but doesn’t seem likely,” said an HSBC currency strategist.

Read More: Dollar Expected to Keep Tight Range

In a move designed to quash speculation that China will continue to revalue its currency, Chinese financial regulators have enacted new rules to limit indirect hedging of the Yuan. Apparently, many businesses with operations in China had been delaying payments to their American suppliers, with the expectation that another revaluation of the Yuan would indirectly lower their payment obligations. As a result of the new rules, these accounts payable will now be treated as foreign exchange accounts and will be subject to certain rules and fees. The Wall Street Journal reports:

Friday’s move also suggests Beijing sees signs that companies continue to position themselves for a further movement beyond July’s 2.1% revaluation of the Yuan, as the US and other governments pressure Chinese authorities to do more.

Read More: Chinese Rule Aims to Check Currency Hedging

Since Alan Greenspan announced that he would retire when his current term expires in January, rumors over his replacement have circulated like wildfires. Yesterday, George Bush put an end to those rumors by nominating Ben Bernanke, considered by many analysts to be the leading candidate for the position. Bernanke is currently the Chairman of the White House Council of Economic Advisors. Prior to acceding to that post, he served as a Professor of Economics at Princeton University. While economists are already trying to predict how Bernanke will conduct monetary policy as Chairman of the Federal Reserve, Bernanke has not given many clues. The Economist reports:

A controversial speech, in which he suggested that America’s gargantuan current-account deficit was due less to government profligacy than to a global savings glut that is flooding America’s debt markets with capital, set off a heated debate that is still raging.

Read More: Bernanke steps into Greenspan’s big shoes

Last week, the Group of 20 industrialized and developing nations met in Beijing to discuss pertinent economic issues. As you can probably guess, the Yuan revaluation was at the forefront of the agenda. When criticized over the nominal 2% revaluation that China effected in July, the chairman of China’s Central Bank offered a Chinese proverb: “crossing the river by touching the stones,” meaning China would prefer to take small steps towards revaluation rather than one or two giant leaps. China also insists it must improve its banking system and financial institutions before it will consider floating the Yuan. While the testimony was predictable, analysts nonetheless reacted with dismay. Dow Jones News reports:

“The long term position is for the Chinese market to liberalize, to become more liquid and to be accessible to international investors…but I would be at the long end of 3-5 year period at least.”

Read More: Currency Flexibility Still Distant for China

In a surprising move, the Central Bank of Philippines raised interest rates for the third time this year. The move was seen by investors as a preemptive response to certain inflationary trends. The Central Bank also admitted to trying to maintain the interest rate differential between Philippines and the US, so that creditors would continue to hold its debt. The Philippines also recently raised its value-added-tax in order to boost government revenues and decrease its reliance on foreign borrowing. The Philippine Peso received support from the news, reports The Financial Times:

Thursday’s action, which lifted the peso in the last few minutes of trade, took the central bank’s overnight borrowing rate to 7.50 percent and its overnight lending rate to 9.75 percent.

Read More: Philippines raises rates to tackle inflation

In recent months, the USD has traded in a tight range against both the Yen and the Euro. This has occurred despite the release of positive economic data and an interest rate differential which increasingly favors the USD. Currency traders have grown disheartened over the repeated failure of the USD to hold onto gains following positive economic announcements. That the economic calendar appears conspicuously empty in the next week is bad sign for the USD, argue traders, because the USD won’t have anything to derive support from. The Wall Street Journal reports:

Analysts suspect that after last week, when the dollar failed to hold onto gains despite economic data that was largely supportive, it is unlikely the dollar will continue its upward trend.

Read More: Dearth of Data Might Pressure Dollar Following Recent Advances

The fear that avian flu will soon become a global pandemic intensified last week, amid reports of outbreak in Russia and Turkey. While the disease is still effectively a moot economic issue, economists and investors are already drawing up worst case scenarios. According to several prominent currency traders, global economic shocks usually hit developing economies (and their currencies) the hardest. Since most developing Asian nations, however, have effectively fixed their currencies to the USD, their currencies will be spared. In this case, the Australian Dollar and New Zealand Kiwi will likely depreciate upon a massive flu outbreak. These currencies are both highly correlated with trade and commodities, and any sign that the global economy is in trouble could send risk-averse investors running for the exits. Reuters reports:

Investors see the fortunes of the Australian and New Zealand dollars as sensitive to even slight changes in global economic growth as they are commodity-based currencies, whose economies are heavily reliant on international trade.

Read More: Some currency investors debate bird flu mutation

In a recent FX report, HSBC touted the merits of “cash and carry” currency trading, in which forex traders hold currencies that yield the highest interest rates, without concerning themselves too much with relative changes in exchange rates. Most practitioners of fundamental analysis would probably be skeptical of such a strategy, as the theory of interest rate parity dictates that the value of a nation’s currency and its benchmark interest rate move in opposite directions, in order to guarantee investors on both sides a similar return. However, HSBC uses the Brazilian Real to exemplify the appreciation of a nation’s currency that often follows an increase in interest rates. The Business Online Reports:

The Brazilian real has appreciated around 18% against the dollar this year and an investor would additionally have gained 15% in carry. This overall 30% return could have been further sweetened through near-free financing by borrowing in yen and Swiss Franc.

Read More: Cash and carry – this year’s most lucrative currency trading bet

In a recent speech, a high-ranking Australian central banker discussed the prospect of Asia forming a union similar to that of the EU and adopting a common currency. Glenn Stevens said such a union is extremely unlikely, because the economies of Asia are too diverse. There are already several multilateral trade and currency agreements that link much of Southeast Asia, leading many pundits to speculate that a common currency represents a logical next-step. However, at this point in time, it seems these nations’ respective monetary policies are sensitive to the US, rather than to each other. Dow Jones News reports:

Wile there have been various calls for a common exchange rate policy, usually based around targeting a common basket, divergent interests within Asia prevent finding an obvious acceptable exchange rate linkage.

Read More: RBA’s Stevens Doubts Asian Monetary Union Any Time Soon

While nearly 3 months have passed since China famously revalued its currency, the subject remains a hot political issue in America. Several politicians, led by Charles Schumer, are again fighting to pass a bill that would levy a 27% tariff on all Chinese imports, if China fails to fully revalue within one year of the bill’s passage. This bill is supported broadly by small businesses and middle market American companies that feel they are being squeezed by low-cost Chinese labor. On the other end of this debate stand multinational companies, many of whom have opened production facilities in China to take advantage of this low-cost labor. These multinationals, which are understandably against Yuan revaluation, have much more political clout, which may explain why President Bush has stubbornly refused to take action against China.

Refco, Inc., one of the world’s largest futures and currency brokerages, announced yesterday that it was forced to freeze customer withdrawals in order to continue to operate. Apparently, Refco holds significant margined USD positions on behalf of certain clients, which it funds through other accountholders’ unused funds. For unknown reasons, Refco suddenly became unable to sustain its margin positions and has placed a moratorium on withdrawals in order to remain liquid. According to certain forex traders, this placed acute pressure on the USD, which was already ‘overstretched.’ Bloomberg News reports:

Refco’s moratorium on withdrawals trapped its customers in holdings of dollar assets. At the same time, the firm’s own positions in dollar assets may be in trouble, and the combination made dollar trading more difficult.

Read More: Dollar Erases Gains as Traders Say Refco Freeze Forces Selling

Investors seeking to clarify the Fed’s monetary policy intentions took mixed comfort in the release of August’s trade numbers. On one hand, the American trade deficit was significant, which detracts from domestic growth and could conceivably lead the Fed to hold interest rates in order to facilitate continued domestic economic growth. On the other hand, the aggregate value of imports increased at the fastest rate in over a decade, which suggests inflation will continue to be a problem. While some disagreement persists, economists believe the fed will reconcile this discrepancy by prioritizing its concerns over inflation, and it will continue to raise interest rates as planned. The Financial Times reports:

Foreign Exchange Analytics said “Oil prices are not going lower in the short-term and second round inflationary effects are guaranteed, leaving the Fed with some heavy lifting on interest rates – straight from neutral to restrictive.”

Read More: Dollar rallies after trade data

Investors around the world have been waiting anxiously for the outcome of the political deadlock that emerged from last week’s national elections in Germany. It was finally revealed that the challenger, Angela Merkel, will assume the position of Chancellor, as Gerhard Schroeder steps down. This did not come without compromise, however, as Merkel’s Christina Democratic Party was forced to build a “Grand Coalition” and share power with other political parties. While Merkel’s eventual victory will no doubt be good for Germany, it may be very difficult for her to push her reform agenda through the other parties involved in the power-sharing arrangement. The Economist reports:

Ms Merkel will struggle to implement the main planks of her proposed reform programme: lower non-wage labour costs, further labour-market reforms…and radical tax reform.

Read More: Merkel clinches it, but the price is high

The Canadian economy has grown quicker than expected in the latter part of this year. This has raised fears of inflation arising in the economy. As a result experts now predict that the Bank of Canada will again be forced to raise interest rates, making this the third such increase inside of a year. According to a recent Forex Reader article the central bank will not likely curb increases until it hits the projected 4% target. Experts see the economy finally starting to show signs of responding to the slow down pressure via the increased rate as evidenced in the drastic turn in small-cap stocks which are profiled in PennyStocksBook.com

Venezuela can be officially added to the list of nations planning to diversify their foreign exchange reserves. Representatives from the country’s Central Bank said that $10 Billion would ultimately be exchanged for Euros, in order to better protect the country from a sudden decline in the USD. One has to wonder, however, if this move may also be motivated by political considerations, as Venezuela and the US have become bitter enemies in recent years.

As the price of oil rose, Venezuela’s oil exports increased in value. Because most of these export receipts were immediately reinvested in US government bonds, the nation accumulated massive foreign exchange holdings. This announcement underscores the risk that other major oil exporters, who have built up equally large holdings of USD, will also diversify. AFX News Limited reports:

If [Venezuela] were to move in line with the largest emerging market nations — which currently hold 40-45 pct of reserves in non-dollar currencies — it would imply a one-off sale of around 10 bln usd.

Read More: Dollar slides on reports Venezuela to diversify reserves

Since the fallout from the summer hurricanes subsided, the USD has traded in very tight range. Traders seem to agree that the USD will likely remain range-bound in the short term, due to a lack of upcoming economic developments. The longer-term outlook depends largely on the actions of the Federal Reserve. While traders have already priced two additional interest rate hikes into US bonds and other securities, there is some concern that the Fed will not follow through if the economy does not appear to be as healthy as originally believed. For this reason, traders are anxiously awaiting the release of the minutes from the latest Fed meeting. The Financial Times reports:

Interest rate expectations remain a key driver for the dollar and traders are asking whether the Fed’s concerns over the inflation outlook will translate into more aggressive monetary tightening next year.

Read More: Dollar direction awaits Fed minutes

In a somewhat surprising move, the European Central Bank (ECB) has opted to hold its benchmark interest rate at 2%. The ECB has found itself in the precarious position of trying to reconcile the risks of inflation with prospects for growth in conducting its monetary policy. Due in part to rising fuel prices, Euro-area inflation has reached a 1-year high, at 2.5%. Meanwhile, growth prospects are also improving as domestic consumption and exports pick up. While a few prominent economists have called on the ECB to lower interest rates, the ECB rarely bows to external pressure. The Financial Times reports:

Although Jean-Claude Trichet was expected to take a more hawkish tone in the afternoon press conference, highlighting inflationary pressures, the threat of weakening growth remains and few analysts expect any upward move for rates until well into next year.

Read More: ECB keeps rates at 2% despite inflation risk

A recent survey of money managers underscores increasing bearishness with regard to the USD, because of both technical and fundamental indicators. From a technical standpoint, trading in the USD-Euro currency pair has been increasingly range-bound, and traders feel an upside-Euro breakout is imminent. From a fundamental standpoint, the short-term USD outlook is tied interest rates, which are expected to either remain constant or rise. While rising interest rates would theoretically provide support for the USD, investors believe an increase has already been priced into the USD. Thus, if rates remain constant, the USD will likely decline. The Financial Times reports:

“Fed officials have been consistently sending out hawkish messages on monetary policy,” said Mansoor Mohi-uddin of UBS. “But for now, it appears as if the good news is being priced into the dollar.”

Read More: Dollar retreats with good news priced in

A recent survey of money managers underscores increasing bearishness with regard to the USD, because of both technical and fundamental indicators. From a technical standpoint, trading in the USD-Euro currency pair has been increasingly range-bound, and traders feel an upside-Euro breakout is imminent. From a fundamental standpoint, the short-term USD outlook is tied interest rates, which are expected to either remain constant or rise. While rising interest rates would theoretically provide support for the USD, investors believe an increase has already been priced into the USD. Thus, if rates remain constant, the USD will likely decline. The Financial Times reports:

“Fed officials have been consistently sending out hawkish messages on monetary policy,” said Mansoor Mohi-uddin of UBS. “But for now, it appears as if the good news is being priced into the dollar.”

Read More: Dollar retreats with good news priced in

The Brazilian Real has climbed 25% against the USD in the last 12 months, thanks to soaring commodity prices and a booming economy. In order to prevent an expensive currency from hurting the export sector, Brazil’s Central Bank has announced that it will begin to buy USD, by auctioning off artificially cheap Reais. While this type of direct intervention should theoretically prevent the currency from appreciating further, analysts believe the Real’s momentum is sustainable, and the intervention will not have a significant impact. Bloomberg News reports:

“The central bank’s intervention may force a correction in prices, but it won’t reverse the main trend in the currency markets, which is for a stronger real.”

Read More: Brazil’s Currency Falls After Bank Sells Reais for Dollars

Heeding the advice of economists and international credit rating agencies, Indonesia has decided to limit fuel subsidies to consumers, which kept the price of fuel in Indonesia artificially low. As oil prices have soared in recent months, Indonesia has been forced to devote an ever-higher fraction of its federal budget to these subsidies, straining its finances. The decision to reduce fuel subsidies was not made lightly, for the country’s improved credit rating may come at the expense of reduced economic growth. In addition, the Indonesia Rupiah benefited from the announcement, but remains down 6% from only 3 months ago. The Financial Times reports:

Indonesia’s senior finance minister, Aburizal Bakrie, said he expected economic growth to be 5.9 per cent this year, down only marginally from a budget forecast of 6 per cent, and for inflation to be back below 10 per cent by the year’s end.

Read More: Markets stable as Jakarta raises oil price

The Canadian Dollar has reached a 13 ½ year high against the USD. The reason, you may have guessed, has a lot to do with oil. A recent report on Canada’s oil resources estimates Canada’s famous oil sands may be worth more than $1 trillion. And that is a conservative estimate. Since the price of oil seems likely to remain above $50 in the long run, Canadian oil producers have reevaluated the viability of certain oil fields, now concluding that oil can be profitably extracted and sold. At this point, it seems nothing short of a complete collapse in the price of oil could halt the momentous run of the Canadian Dollar. The Ottawa Sun reports:

“The study … showed the oil sands are going to significantly contribute to the GDP growth over the next 15 years. That refocused a lot of international accounts on the whole ‘Canada as a big oil producer story.’ “

Read More: Loonie takes off for high