Brave New World

FX Review for 26 March 27/03/2009

Following the riotous price action yesterday afternoon the foreign exchange market has been very quiet, with the main pairs trading in narrow ranges in Asian and European morning trading. As was noted in an earlier post, US Treasury Secretary Geithner’s comments that the US would consider proposals to expand the IMF’s SDR led to a brief but almighty US dollar collapse. Thereafter followed a haste retraction, a restatement of the strong dollar policy and a USD positive reaction in the market. Subsequent comments in favour of expanding the SDR came from a number of important figures, notably IMF chief Dominique Strauss-Kahn and influential financier George Soros. The move to creating an international reserve currency away from the USD appears to be, in academic circles at least, a serious proposition but one which will ultimately take time to implement. It is important to remember that the creation of a reserve currency does isn’t necessarily a signal to sell dollars. The USD makes up 42% of the basket of the SDR whereas the EUR accounts for 36%. The sharp move up in EURUSD yesterday had little fundamental justification. 

In the UK retail sales come in line with expectations, with a drop of -1.9% in February versus the market expectation of 0.4%, bringing the annual rate of increase to 2.5%- the lowers since 1995. Market reaction was minimal. The forward looking Germany GFK sentiment index fell 2.4 in April from 2.5 in March. French Consumer confidence index in March came in at -43, again in line with expectations.