Yen Falls On Risk Hungry Markets

Japanese yen restarted its falling against other world currencies today (even against the dropping dollar) as the risk hungry investors begin to reenter carry trades. While the Nikkei 225 index gained a little more than 1 percent — first rising day after four consecutive losing days, Yen lost more than 1 percent of its value to the high-yielding currencies.

Among highest gainers against JPY today are the New Zealand dollar and Australian dollar. After the global volatility index dropped slightly yesterday and Japanese stock market showed some growth today, Forex carry traders decided to short on yen to profit from the current outstanding interest rates difference. Aussie has the interest rate at 8.25% and the kiwi’s interest rate is 6.75%, making these two currencies a no-brainer as the long currency for the short yen’s 0.50%.

The question remains though if this is a start of a long term tendency or one of the final correction waves before a further yen appreciation and the complete abandonment of the carry trade, as the markets have been seeing it since 2001. As it often happens in the financial markets, the answer will be revealed in the days to come. If Bank of Japan will oppose the Japanese yen appreciation, as they said they are going to, carry trade may see another start.

Iran, Venezuela Concerned With Weak Dollar

OPEC summit, which is to be held this weekend, could become a field of discussion of possible dollar abandonment as the official OPEC’s oil currency. Iran and Venezuela, concerned with the dollars continuous fall against other world currencies, are interested in changing oil pricing to other major currencies.

Putting this question to the OPEC’s summit discussion list is in the interest of both of those countries. But Saudi Arabia, OPEC’s largest oil exporter and one of the closest U.S. allies in the Middle East, views such attempts as more harmful to the dollar than useful to OPEC members. Indeed, dropping dollar as the oil pricing currency will significantly decrease the demand of this currency, causing its collapse on the Forex market.

While Iran and Venezuela may have geopolitical reasons for dollar’s abandonment, most of OPEC countries are still strongly tied to dollar with a little or no diversification to other currencies. That said, dollar collapse is the last thing a country needs before diversifying its reserves to euros or pounds.

To make any changes to OPEC’s currency policy, Iran and Venezuela need to gain a major influence in this organization. But while they are considered as the marginal geopolitical bodies, it’s hardly can happen; other members will oppose any movements which are aimed mainly against U.S. than in the favor of OPEC countries. As Abdalla Salem el-Badri, Secretary-General of OPEC, said last Wednesday:

It was not in the declaration in the first place and it won’t be in the final declaration, period. It’s not Saudi Arabia’s position, it’s everybody’s position.

U.A.E. And Qatar Are Ready To Abandon Dollar

United Arab Emirates and Qatar may drop their currencies’ pegs to dollar without waiting for their GCC partners, Omar Bin Sulaiman the governor of the Dubai International Financial Centre said. Increased pressure from that falling dollar, wounded by the mortgage crisis in U.S., inflicts vulnerability on these Middle Eastern oil exporting countries.

As it was mentioned before, U.A.E. may start its Forex reserves diversification right after GCC leaders meeting earlier this December. Qatar is joining Emirates in their determination to act independently of other partner countries. The earlier they get out of the huge dollar national reserves to other countries the better will be the exchange rates. And seeing that Saudi Arabia as the U.S. major ally in the Middle East is not going to make any changes to its foreign reserves policy, U.A.E. and Qatar think that they just don’t have more time to wait.

For both it is a significant step in moving out of the U.S. currency influence zone to a more globally diversified system, which would eventually possibly allow for a more smooth transfer from dollar as the oil trading currency to other world currencies.

(Based on the Bloomberg materials.)

U.A.E. Will Lower Its Dollar Peg

Sultan bin Nasser al-Suwaidi, Central Bank Governor, said in Gwacheon, South Korea, today that U.A.E. will end the dirham‘s peg to the U.S. dollar, if it will continue further to depreciate against euro. U.A.E. dirham’s peg to the dollar is almost 30 years old; it started in 1978 and will be probably stopped this or next year.

Dollar’s devaluation causes inflation of imported goods for U.A.E. (they have to import a vast majority of consumed goods). Decreasing the weight of dollar in its currency basket peg (which is currently at 100%), will help Emirates to slowdown such inflation. Al-Suwaidi wasn’t talking about complete abandonment of U.S. dollar, but just adding more major world currencies to the basket. He said:

The plan is not to drop the dollar-peg but maybe to reduce it to a basket which will consist of more dollars, but not totally 100 percent.

This would be not the first time for the Gulf country to stop dollar peg – Kuwait ended its full dollar peg and diversified to a currency basket 6 month ago – in May. United Arab Emirates agreed with its neighbors (Saudi Arabia, Qatar, Bahrain, Oman and Kuwait) not to drop dollar without each other. And they will soon discuss this question on their next meeting in Qatar this December, 3.

For U.S. dollar this can mean a serious pushdown, depending on the volume of reserved dollars to be exchanged to other currencies. U.A.E. and Gulf countries in general have a tremendous currency reserves bloated and increasing on a daily basis thanks to the high oil prices. Such speech by U.A.E. Central Bank Governor can already pull dollar down on Forex, but even bigger problems will await it if these plans become a reality.

Bernanke: More Transparency To Monetary Policy

Federal Reserve Chairman Ben Bernanke spoke on Fed’s communications at Annual Monetary Conference today. In contrast to his predecessors that praised a secretive atmosphere of FOMC‘s decisions, Bernanke said that transparency and more detailed information will help markets to understands monetary policy better. In this context he announced about a new communications strategy of the Federal Reserve.

This strategy is set to bring more detailed information to market participants on a more timely manner. The following changes will be done to the communication process:

• Release projections will be compiled four times a year (before — twice a year)
• Projection horizon will be extended from two to three years
• FOMC meeting participants will provide projections for PCE inflation, GDP growth, unemployment rate and core PCE inflation
• Projections of nominal GDP will be discontinued as noninformative
• Summaries and explanations of these projections will be published along with the minutes releases for the meetings on which they were discussed
• These explanations will include “risks of the economic outlook and the dispersion of views among policymakers”

Bernanke promises more information and more often. The result of this important step may be really surprising. If market participants won’t get lost in the variety of data (which may come very inaccurate with such a long-term details level), they will get into the monetary policy decisions more stepwise with a better understanding of FOMC’s expectations and how these expectations will be transformed into rates cuts and hikes.