Daily Forex Commentary
By Jack Crooks

Key News
Federal Reserve Bank of Kansas City president Thomas Hoenig said the US current account deficit will probably widen. (Bloomberg)

The dominance of US dollars in the mainland's foreign exchange reserves poses a serious financial risk to the country, the China Daily warned. (The Standard)

Key Reports (WSJ)
8:30am: 2Q final GDP. Consensus: +3.1%. Previous: +2.8%.

Quotable
In studying financial history, we are studying systems more complex and chaotic than the weather.
Niall Ferguson, The Cash Nexus

FX Trading
In basketball lingo, when you want to steal the ball and go the other way, and it's late in the game, the coach calls for a "full-court press". It seems a full-court press  is shaping up against the dollar.

"It is becoming more and more evident that the possibility of a further slump of the US dollar is increasing,"' said Jiang Ruiping, director of China Foreign Affairs University's Department of International Economics, The Standard reported. "To ward off foreign exchange risks, China needs to readjust the current structure, increasing the proportion of the euro in its foreign exchange reserves,'' he said. Presently, China holds approximately two-thirds of its estimated $483 billion foreign exchange reserves in US dollars.

And earlier in the week, Morgan Stanley economist Stephen Roach said, "The global economy is on a collision course." He cites the US trade and current account as the key dangers. He believes the US dollar should be the natural pressure valve to help rebalance the global economy. He expects the dollar will feel the deficit pain sooner or later. A dollar "managed" lower, is better than a dollar "crashing" lower probably summarizes Mr Roach's view in a nutshell.

And writing in the Economist magazine a couple of weeks ago, Fred Bergsten, director of the Institute for International Economics (sounds impressive doesn't it) penned a track similar to Mr Roach's. The deficits are a major risk that could lead to a dollar crash, says Mr Bergsten.

On Monday this week, this story passed by on the Dow Jones wires, and was sent to me by one of my readers: "Pressure Grows On G7 To Agree Dlr Devaluation":  

LONDON (Dow Jones) - US President George W Bush is being urged to signal a dollar devaluation of up to 20% to rebalance the global economy ahead of Friday's Group of Seven and International Monetary Fund meetings in Washington, the UK's The Business newspaper reported. Senior US administration officials in Washington have over the past few days tried to influence the White House and US Treasury to put pressure on the G7 to agree to a dollar depreciation in its final statement, the newspaper said.

Will this full-court press against the buck lead to anything substantial from the G7 meeting on Friday? Ah, another question without an answer. That's a consistent theme in the currency markets.

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