Forex Blog: Currency Trading News & Analysis.

May 21st 2008

Dollar Rally & Intervention

After the G7 meeting, during which officials finally commented on the "volatility" in forex markets, the Dollar rapidly appreciated over 5%. Analysts had previously ascribed this rally to a variety of factors, both technical and fundamental. For example, the Dollar was oversold. The EU economy is faring worse than the US economy. The interest rate differential has stabilized and may favor the US in the medium-term. The Dollar will remain the world’s reserve currency through the duration of the credit crisis.

Recently, a new theory has begun to circulate- that US officials are prodding large holders of USD assets to support the Dollar, because a strong Dollar is conducive to global price and economic stability. The rumor was sparked by comments made by high-ranking officials in the EU and US governments, suggesting that the Bush administration is finally putting some force behind its "Strong Dollar" policy. Specifically, it has been speculated that the BRIC countries (Brazil, Russia, India, China) have been requested to stop diversifying their forex reserves away from Dollars. Some have speculated further that the Fed may directly intervene in forex markets, a move which would be supported by the Dollar’s upward momentum. Marketwatch reports:

"The G-7 would be smart to consider a strong intervention effort geared at pushing speculators toward their pain threshold."

Read More: Dollar rally, leaks put fresh focus on G7 meetings

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Posted by Adam Kritzer | in Politics & Policy, US Dollar | No Comments »

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