Dollar Slides as Pressure Increases on China to Revalue- Will it Matter? (page 2 of 2)

This is in line with continued improvement in the Eurozone economy and the need for more rate hikes by the ECB. It remains questionable though how hawkish the central bank will be. ECB President Trichet is speaking at 5pm EST, so it will be interesting to see if he talks down the Euro once again following a 300 pip rise over the past week.

British Pound - The British pound is soaring today thanks not only to dollar bearishness, but also firmer UK data. Retail sales increased a more than expected 0.7 percent last month even though there was a milder downward revision the previous month.

This is quite encouraging in the context of generally mixed economic data. Consumer spending has remained relatively stable, which should help to offset some of the bearish sentiment brought on by the weak inflation growth figures reported last week. Nonetheless it doesn't change the landscape much for the Bank of England.

The central bank is still expected to leave interest rates unchanged. Mortgage lending and public finances both increased more than expected indicating that for the time being, the UK economy is holding on.

Japanese Yen - The Japanese Yen was undoubtedly the day's biggest mover. After having range traded for 2.5 months, the currency has finally broken out and is dictating overall market activity. As the proxy for Asia, the yen is most sensitive to any developments in China and at the moment, the big question is how China will respond.

In the worst case scenario that China is also branded a currency manipulator as we mentioned in the dollar section, will that be enough to force them to change their currency regime? China has proven to not be one to succumb to international pressure and each move that they have made in the past has been very politically astute. Just take the Chinese President's visit to the US.

Even though there was widespread speculation that the Chinese President could make a major foreign exchange related announcement - he didn't. Yet ahead of the US Treasury's report, China may very well make a minor but symbolically important shift that if branded as a currency manipulator, they could use as rebuttal. A major shift however will be unlikely since China has already downplayed the G7's criticism. In addition, as indicated by Stephen Roach of Morgan Stanley, China does not want to be the scapegoat for the US' self created problem.

He argues that "America's unprecedented savings deficiency" is what got the current account balances to where it is now. More interestingly though, he adds that back in the 1980s, when the US had its first major current account deficit, it screamed unfair value and pressured Japan, the country that it had the biggest gap with back then the same way it is pressuring China now to let the yen rise so that the gap would be closed.

Japan agreed and let USD/JPY slide but sadly the strong yen was what fueled the major asset bubble that eventually led to the Asian Financial crisis. Roach says that China is far weaker economically now than Japan was then and in such a sensitive time, they probably have no interest in making the same mistakes that Japan did. These are fascinating comments by Roach that are well worth noting.