Wednesday, April 23, 2008

Markets Are Right To Ignore G7 Statement

Canadian finance minister Jim Flaherty, along with his colleagues from Luxembourg and France, complains that the currency markets have been ignoring the G7 statement calling for a stronger dollar.

They're right about that in the sense that apart from a small and short-lived bounce immediately after the meeting, the markets have indeed ignored the G7 statement. But as I pointed out then, the markets should ignore that statement. There are no reason to act on the mere words of anyone, unless they either contain persuasive arguments about the fundamentals or threats of concrete action to change the fundamentals, which in this case would mean eithr interest rate cuts outside America, interest rate increases in America or direct foreign exchange interventions. But as the statement neither contained persuasive arguments or the hints of action, it deserved to be ignored.


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