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Forex Flash: Despite Gold rush, broader FX markets stabilized and recovered - DBS Group

FXstreet.com (Barcelona) - Despite the collapse in gold prices last Friday and Monday, DBS Group analysts note that the broader market stabilized and recovered yesterday.

They note that Gold fell more than $200 during these two days on global growth worries resulting from disappointing data in the world’s large and major economies. They add that policymakers were, however, more sanguine. They write, “For example, China views its sub-8% growth as a structural shift towards a more sustainable economic model. Germany did not expect the weaker-than expected ZEW to hijack the recovery this year.”

They feel that the other less talked about reason for the weaker gold prices was probably the debate within the Fed about reducing asset purchases under QE3. On this issue, they see that New York Fed President William Dudley said yesterday that the disappointment in the latest jobs report gave him pause and that more clarity was also needed on the effects of fiscal tightening in the coming months. They write, “Put simply, Dudley favored a wait-and-see approach before any decision to adjust QE3. Lest we forget, the White House and Republican lawmakers have only a month to find a middle ground on how to consolidate the fiscal deficit. The US government had earlier agreed to temporarily suspend the decision to lift the federal debt ceiling to May 19.”

Against this background, they note that it should not come as a surprise why the US Treasury Currency Report issued last Friday strongly urged East Asia’s largest economies – China, Japan, South Korea and Taiwan – to refrain from intervention in exchange rates. China has been guiding its USD/CNY central parity to new lows despite slower GDP growth, lower inflation and a trade deficit. The Korean won has recovered strongly in the past two days after this currency report.

They finish by adding that the G20 Finance Ministers and Central Bank Governors’ Meeting will be held in Washington D.C. on April 18-19. They write, “This meeting will focus on implementing the G20 Framework for Strong Sustainable and Balanced Growth. To achieve this, the Treasury currency report stated clearly that the US intends to push for concrete adherence to recent G7/G20 commitments on exchange rate. Except the Japanese yen,the US dollar is slowing losing ground to the European and emerging Asian currencies.”

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