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. Continued... |