Currency issues are expected to take center stage this weekend as finance ministers and bankers from the world’s seven richest nations gather for a meeting in Essen, Germany. Weakness in the Yen will likely spark a debate involving Germany, who wants the G7 (see info below) nations to prevent hedge funds from having too much influence over currency markets. Might something surprising come out of this meeting by Monday morning?
At the heart of the matter is the yen's weakness against the euro. It's caused some concern among EU finance ministers because it makes Japanese goods less expensive than those made by companies in the EU. The question becomes what role do hedge funds play in the Yen’s value?
“Hedge funds have played a role and continue to play a role in the Yen’s weakness,” said Rebecca Patterson, Global Currency Strategist at JP Morgan. “The hedge fund market is short Yen. But I wouldn’t overestimate the influence.”
Lara Rhame, Currency Strategist at Credit Suisse agreed. “I think hedge funds are going to come under a lot of scrutiny but they are not the only active participant in what many consider to be a crowded trade.”
It seems Germany sees it differently. German Bundesbank President Axel Weber told the Associated Press that "Hedge fund risks must be closely monitored."
“To me (that’s) one of the more significant risks,” added Rhame. “If we do get a statement about concern for hedge fund leverage we could see more of a risk aversion develop in the market after the G7.”
“While the G7 might say something about hedge funds and regulations broadly, I think they’re going to be very careful not to upset the apple cart,” explained Rebecca Patterson. “At the end of the day I think they realize if they say something that causes a disorderly unwind… they could do more harm than good."
The G7 nations are Canada, France, Germany, Great Britain, Italy, Japan, and the United States. Meetings began in 1975.
FYI--Russia is not included in the G7 group's economic meetings for financial officials, since its economy is currently--comparatively small as measured by gross domestic product. The term G7 now refers specifically to the seven countries excluding Russia. The so called G8 is made up of the G7 countries AND Russia. The G8 will have meetings this summer--also in Germany. (source: Wikipedia)