G20 deal seen as temporary currency truce

If currency markets had a message afterthe G20 finance ministers' agreement to avoid competitive devaluation, it was that the deal is seen only as a temporary truce, one that will mean further weakening of the dollar.

The day after, the U.S. dollar touched 80.41 yen, a 15-year low.

Global finance chiefs ended their meeting and failed to agree on a U.S. request to keep current account imbalances at around four per cent.

TheG20 communiqu announced that the International Monetary Fund would assume the role of monitor of members' current account balances for excesses butit set no specific target to even out trade imbalances.

That would require heavy exporters like China and Germany to boost domestic demand, in turn helping other countries like the U.S. export more.

Firmer guidelines may come out of the meeting of world leaders in South Korea from Nov. 11-12, but for now nothing has changed.

China may move closer to a floating exchange rate, but not likely in a speedy manner.

Japan, Brazil and Thailand, which have moved to push down the value of their currencies in a move to protect exports, could take further steps in that direction, possibly to be joined by South Korea, the Philippines, Malaysia and India.

The fear is that would derail the global recovery.

In a commentary, Vancouver-based Citizens Bank attributed the U.S. dollar selling to the meeting ending with an "absence of any specific mechanism for managing currency valuations."

"Since the G20 has no powers of enforcement and the IMF is generally viewed as reluctant to openly criticize its more powerful members, the effectiveness of this policy is somewhat doubtful," Citizens Bank said.

"The communiqu is wide open to varying interpretations," said Mitul Kotecha, head of global foreign exchange strategy at Credit Agricole.

"So whilst a currency war was always unlikely, skirmishes will continue," said Kotecha.

"The agreement the finance ministers reached is being interpreted by the market as a go-ahead to the U.S. to further devalue the dollar, that the developing countries won't partake in a competitive currency devaluation," said Victor Shum, an energy analyst with Pervin & Gertz in Singapore.

"It's a signal to the market that some more weakening of the U.S. dollar will probably be tolerated by everybody else."

The greenback has moved lower recently ahead of the U.S. Federal Reserve's expected expansion of the U.S. money supply, an attempt to boost growth, that is widely anticipated to be announced Nov. 3.

"The currency markets were not fooled and promptly sold the U.S. dollar... including putting in a new low against the Japanese yen," said Andrew Busch, global currency and public policy strategist at BMO Capital Markets.

"The driving theme for the markets remains a lower U.S. dollar via (quantitative easing) for floating currency countries and higher current account imbalances for managed currency countries."

The "G20 is a big boat," said Chris King, vice-president and portfolio manager at Morgan, Meighen and Associates in Toronto.

"It's tough to move it in any direction but you do make little incremental shifts in the rudder and it steers the group to your intended destination," he said.