London: The dollar slipped yesterday after world financial leaders failed to reach agreement on currency imbalances, leaving the Federal Reserve set to pursue loose monetary policy to support the ailing US economy.
The IMF's failure to reach an accord on how to tackle the issue at meetings over the weekend seemed to ensure currency tensions would only fester further and left dealers wondering when more governments would take action to shift the burden of the falling dollar.
"There looks to be no basis for agreement on currency imbalances from the weekend meetings and the US looks set to continue to pursue loose monetary policy going forward," said Neil Mellor, currency strategist at Bank of New York Mellon.
The US September employment report exacerbated concerns over its economy on Friday, showing the labour market shrank for the fourth consecutive month. Traders said the next focus would be on Fed minutes today for fresh insight into the central bank's thinking on monetary easing measures.
Debate centres on whether the Fed will opt for a drip-feed QE or a "shock and awe announcement", with most investors thinking the trigger will be pulled at its next policy meeting in November.
The dollar's losses were slightly offset by China's decision, according to Reuters sources, to raise temporarily its deposit reserve ratio for six big banks on Monday, which dented risk appetite in early European trade but had no major market impact. With only a vague plan to monitor large countries' economic policies more closely, the weekend IMF meeting ended without concrete action on exchange rates.
"Overall, despite occasional reference to a strong dollar policy — which increasingly sounds anachronistic — there is little to suggest that the dollar's direction is anything but down," said Steven Englander, Citigroup's director of global foreign exchange strategy.
Impact on growth
That was likely not lost on European policymakers, who fear a stronger euro will hurt growth in the 16-nation Eurozone.
The discord among global policymakers over the currency issue has been striking. Brazil has doubled a tax on foreign purchases of local bonds. South Korea has warned of new trading limits, and India has said it may intervene in currency markets. China has reaffirmed plans to allow eventual currency appreciation, but at its own pace.
"That there seems to be lack of agreement as to what needs to be done at the global level with the major economies is of concern to us," said Thailand's finance minister, Korn Chatikavanij, at the IMF meeting. "There seems to be a race to the bottom...and that's very problematic."
Alan Ruskin, the head of Deutsche Bank's global G10 currency strategy, said the trend in currencies is the logical consequence of divergent economic trends, and in the long run is necessary to smooth out imbalances in the global economy.
