The dollar could gain against the yen and other Asian currencies on Monday after the Group of Seven rich economies chose to go easy on China, reiterating its previous statements on the need for foreign exchange flexibility, analysts said.
Friday's communiqué repeated the language adopted last September in Dubai and refined at a meeting in Boca Raton, Florida, in February, which urged flexibility in exchange rates.
"We emphasise that more flexibility is desirable for major countries or economic areas that lack such fertility to promote smooth and widespread adjustments in the international financial system, based on market mechanisms," the G7 said.
Those statements were perceived as aimed at China and other Asian nations, where pegs or official interventions are more frequent.
Analysts, however, viewed the communique as taking a soft stance on China, something they found curious given some fairly strong comments from US Treasury Secretary John Snow about Beijing's foreign exchange peg before the G7 meeting.
"The fact that the statement made no mention of China even though it has been invited to the meeting, suggests there could be more going on behind the scenes that we don't know of," said Michael Woolfolk, senior currency strategist, at Bank of New York.
China, while showing willingness to adopt a more flexible currency policy on Friday, gave no indication of a timetable for removing the yuan's peg, currently at 8.28 to the dollar.
"As a result, the dollar could trade more firmly on Monday as the outcome suggested no near-term threat of Asian revaluation," said Woolfolk.
He said the yen could weaken because the China decision and the G7 statement suggest all other Asian currencies would have to stay soft to keep their exports competitive vis-a-vis China.
On the other hand, some analysts say the G7 statement might not have any impact on the yen. Steven Englander, chief currency strategist at Barclays Capital in New York, said the yen responds more to higher oil prices and Japanese economic data. Japan, which imports almost all of its oil, is viewed as the most vulnerable among the major economies to any spike in crude costs.
"I think the yen has more to gain if oil prices come off a bit. Also more important for the yen than the G7 is the outcome of the Tankan (Japanese business sentiment) survey," said Englander.
The US currency gained on Friday on some position-adjustment in the wake of the G7 meeting. But earlier last week, the dollar had fallen to its lowest level since mid-July against the euro and sagged against other currencies on some caution ahead of the G7 event. With the G7 meeting out of the way, markets will focus on economic fundamentals, which some analysts say should bode well for the dollar.
"There was a risk premium on the dollar going into the G7 meeting. Even with bond yields rising, the dollar has never really caught up," said Bob Sinche, head of global foreign exchange strategy at Bank of America in New York. US 10-year Treasury bond yields closed at around 4.18 percent on Friday. A few weeks ago, bond yields fell below 4 percent as investors grew cautious about US economic prospects.
"But I expect the dollar to rebound and catch up with the rise in bond yields and the improvement in economic data. We had pretty good auto sales numbers on Friday which were stronger than consensus. In general, I think we would have pretty good (economic numbers) for September," said Sinche.
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