Dollar Weakness?

Brad Setser fears? thinks? hopes? that the international financial Day of Wrath is finally at hand:

RGE - Brad Setser's Web Log: Can the dollar block survive another bout of dollar weakness? In case you haven't noticed, the dollar is now closer to 1.30 (v. the euro) than 1.20 - or even 1.15. Carry is no longer king. There is talk of a "regime change" in the fx market. Or at least an attitude change.... Steve Johnson of the FT:

Furthermore, the final communique from last weekend's G7 meeting, which called for greater currency flexibility in emerging Asia to help reduce global imbalances... also led to expectations that the dollar might finally weaken against Asian currencies.

Indeed this happened - for an entire 24 hours - before Japan started complaining about the speed of the move and South Korea backed up its own complaints with a wall of intervention to stop the won from strengthening.

I feel for the Koreans. The Bank of Korea seems to want to run an independent monetary policy. They don't want to be part of the dollar block. But it is hard out there for a won... when the rest of North Asia sits out the dollar move. Japan's Vice Minister is working hard to keep the yen very, very weak in real terms. And China decided not to operate a basket peg last week. The won isn't just strong v. the dollar. It is also strong v. its etymological cousins the yen and the yuan.

And against the Gulf currencies.

The US may - or may not - have a weak (strike weak; insert competitive) dollar policy. Tim Adams certainly would like China to have a strong RMB policy. Bernanke denied the G-7 statement signaled any intent to manage the dollar down, but he also said the G-7 wants market determined exchange rates. Bloomberg:

Bernanke today also said it is not correct'' that the G-7 sought to weaken the dollar. The groupsupports a market- determined dollar,'' he said.

In the first quarter, countries outside the G-7 spent about $180b (by my calculations) resisting market pressures for their currencies to appreciate. A market exchange rate for the dollar right now means a weaker dollar...