Dollar down again as G20 backs ongoing stimulus

The euro pushed back up above $1.50 Monday after finance ministers from the Group of 20 rich and developing countries steered clear from addressing the weakness of the U.S. currency against most of its competitors at a meeting over the weekend.

At the meeting in St. Andrews, Scotland, the finance ministers pledged to "continue to provide support for the economy until the recovery is assured" - in effect telling the markets that borrowing costs will not be rising any time soon.

As a result, investors continued Monday to borrow cheap dollars - with the Fed funds rate in a range of 0-0.25 percent, the cost of borrowing dollars is anything but prohibitive - to finance riskier investments, such as stocks and oil. According to economist Nouriel Roubini, developments in financial markets over recent months, particularly the sharp rise in stocks since March, have been characterized by this "mother of all carry trades."

In a note prepared for the meeting, the International Monetary Fund said the dollar was "now serving as the funding currency for carry trades," and that these trades may be "contributing to upward pressure on the euro."

That's certainly been the case Monday, with the euro rising 0.9 percent to $1.5011, the first time it has breached the $1.50 barrier this month.

"The G-20 has given the green light to carry trades to continue," said Neil Mackinnon, global macro strategist at VTB Capital in London.

However, he warned that carry trades "have a tendency to blow up when you least expect it" and that these can be "quite sudden and violent moves."

Mackinnon said it's impossible to predict when these carry trades will blow up and that for now traders are going with the flow - "the trend is your friend," he said.

The IMF further fanned the dollar saying by saying in its note to the G-20 that the U.S. currency was still "on the strong side" in terms of its trade-weighted basis.

While the dollar may be weak against the euro, it is considered to be overvalued against the Chinese yuan as the Chinese monetary authorities try to keep their currency weak in order to boost economic activity by keeping exports keenly priced.

Many of the world's leaders have spoken of the need for "rebalancing" the world economy.

For the rebalancing of the economy to take place, the U.S. will have to consume less while it builds up its savings rate, while surplus countries, including dollar-rich China, start spending more to take up the slack left from lower U.S. spending. One way of helping this take place is to get the yuan to rise towards more normal levels against the dollar.

But so far nothing has happened at least on a coordinated front.

"The G-20 meeting failed to deliver any real specifics as to how it intended to rebalance the global economy, suggesting the drift in the dollar is not likely to be addressed on a coordinated basis," said Daragh Maher, deputy head of global foreign exchange strategy at Calyon Credit Agricole.

With neither policy nor the data standing in the way, Maher said the euro could now move back up to the recent 15-month high of $1.5060.

A further sustained rise up to the all-time high of $1.6038 could well stoke concerns in Europe's capitals that the high value of the currency was threatening the economic recovery.

"It is difficult to see this policy mix as anything other than a recipe for continued dollar weakness, particularly when we add the familiar absence of concerted plans for cooperative, corrective action by the G-20," said Neil Mellor, senior currency strategist at Bank of New York Mellon.

"With the dollar therefore back on course for some discomfort-inducing levels - thanks, in addition, to the IMF's rather frank assessment that the dollar is still 'on the strong side' - the tolerance thresholds of various central banks and finance ministries is once more back under the spotlight," he added.