Can New G7 Statement Reverse USD Slump?

The G7 has spoken. After discussions in Washington on Friday, G7’s finance ministers and central bankers issued a statement saying that the current financial market turmoil “remains entrenched and more protracted” than they had anticipated. They have also modified their statement on currencies by saying they are concerned about the possible implications brought about by sharp fluctuations in major currencies. They didn’t specifically mention the US dollar in the statement. As long as they don’t intervene in the currency markets, the USD is likely to look bearish. Although the US dollar’s rapid drop against currencies like the Euro, yen, Canadian dollar has caused some displeasure from policymakers and business lobby groups, traders and investors have difficulty in not shorting the USD seeing how the whole economic situation is worsening in the US. And even though US Treasury Secretary Paulson keeps repeating the politically correct phrase of being in support of a strong dollar, no one can deny the falling dollar has been helping US exports, which is a benefit in itself. US policymakers are likely to appreciate that, but that is something they can’t really reveal. Martin Feldstein, president of the US-based National Bureau of Economic Research, said Friday the dollar “needs to fall further” because “the United States needs to continue to reduce its trade deficit”. He also said “European countries need to get ready for a falling dollar”.
Although Bernanke and Greenspan are forecasting an improvement in conditions as early as later this year, there is a chance things may not pan out that way. After all, Bernanke had been late in recognising the cracks in the economy, and Greenspan has had a part to play in the current financial and economic situation. 77-year-old George Soros, billionaire investor, said last Monday that he considered this the biggest financial crisis of his lifetime.