Leaked Draft of G20 Communique Is Dollar Bullish

03/31/2009 10:04 am EST

Focus: FOREX

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

One of the biggest event risks this week for the foreign exchange market is the G20 meeting, which starts on Thursday, April 2 in London. Unfortunately, even before the start of the meeting, it is proving to be a big disappointment. The Financial Times has gotten its hands on a draft of the communique, or "statement," that the leaders of the world's 20 largest economies will release on Thursday.

The communique mentioned nothing about currencies in contrast to all of the hype about a global reserve currency last week and no fresh announcement about a new fiscal stimulus. This of course is just a draft and many changes could be made at the meeting, but at a time when the market is worried about GM and/or Chrysler bankruptcy, the failure to provide any specific financial commitment to boosting the global economy has been a huge disappointment. The dollar's rally reflects the increased pessimism and relief that a global reserve currency to replace the greenback was not mentioned at the meeting.

Interestingly, we did not see any clear indications of China's hand in drafting the communique. There was no subtle criticism or direct attack on the US efforts to stimulate the economy.

What Did the Communique Cover?

In general, G20 leaders tried to remain optimistic. They talked about all of the "unprecedented and concerted" fiscal actions that they have already taken. These global initiatives are expected to help the world economy begin growing again next year and should generate 20 million jobs and increase output by 2% over the next few years.

The G20 also committed more money to the IMF. No specific dollar amount was listed in the draft, but the street estimate is $500 billion. Giving the IMF more money will help developing countries that are at the brink of bankruptcy. The group also pledged to avoid protectionism, reform financial regulations, take action on bankers' pay and bonuses, and crack down on tax havens.

The communique ends with an agreement to meet again before the end of this year to review progress on their commitments.

By Kathy Lien, Director of Currency Research at GFTForex.com

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