Never mind what the commentariat thinks: for the real take on how the G8’s panning out, take a look at how the markets are reacting. John Authers:
For currency traders, the G8 was notable solely for what was not said and for who was not there. Rhetoric suggested the summit would be the “high noon” for the dollar as a reserve currency, as China pushed for a more diversified anchor for foreign exchange.
But currencies are not even mentioned in the draft communiqué. China’s premier was not present for the discussions, thanks to trouble at home. The showdown on the dollar’s future did not happen. Rather than dancing to the tune of the world’s leaders, forex markets suffered a new wave of aversion to risk.
That wave started in the commodities market, where prices dipped sharply. The CRB index, a broad index of commodity prices, dropped to its lowest level since early May, pushing below its 200-day moving average – a strong signal that its rebound of the past few months was over. The CRB is down more than 12 per cent since it topped out last month and is 51 per cent below its high set last year. This implies that deflation – falling prices and stalled economic activity – is a much greater risk than the resurgent inflation that was being talked about only weeks ago.
Gold, an inflation hedge, fell 2.2 per cent and is now down more than 10 per cent since it hit $1,000 per ounce in February. In currencies, the Japanese yen, which gains when people are anxious, made dramatic and sudden gains against the dollar and the euro. This could increase pressure to intervene to keep the currency cheap.
These developments are alarming. The pendulum in the debate between inflationists and deflationists has swung back to the deflationists – at a point that inflation still looks the lesser evil. But at least risk aversion will help the dollar avoid further falls and delay the moment when it is replaced as a reserve currency.
