Jane Foley, Research Analyst at Rabobank, sees greater likelihood that US officials may have pressured other central bankers to step back from currency wars rather than attempt to secure an agreement specifically targeting the value of the USD. Key Quotes “Yellen recently publically admitted that the FOMC had not anticipated the extent of the USD’s rise during the H2 2014 and we would argue that this appreciation had a not insubstantial impact in slowing the need for rate hikes from the Fed this year. A second factor supporting the conspiracy theory is the indication from ECB Governor Draghi last month that he didn’t see room for further rate cuts – the main weapon in a currency war. While Draghi appeared to be walking away from the currency war last month, it is still a stretch to believe that this decision was triggered by a request from the Fed not to push the USD higher. A third factor related to the conspiracy theory comes from the reports in late March that the US executive director on the IMF’s executive board had levelled a complaint about the RBA’s “public statements on the desired direction of the exchange rate”. It is common for the RBA, along with the RBNZ and SNB to attempt to ‘jawbone’ their currencies lower. None of these banks are G7 members and so none have signed up to numerous G7 communiques that favour market pressures in the setting of exchange rate values. A common theme is that these three central banks have been contending with currencies which have been overvalued on several measures for many years. While there is some defence to the use of verbal intervention by these specific central banks, this compliant from a US official nevertheless highlights the degree of disgruntlement in the US with respect to the strong dollar. Although it is the Treasury rather than the FOMC that officially sets USD policy, the dovish commentary from Fed Chair Yellen does fit with the notion that the US central bank is no longer willing to be a passive victim of currency wars. While a combination of dovish comments from Yellen and conspiracy theory talk is weighing on the greenback, there has been a gradual reduction of long USD positions for some months suggesting that further USD declines may be tough given that the Fed is signalled that it is still likely to hike rates this year. While we do expect the USD to recover some ground in the coming months, the recent weakness of the USD does raise the chance that some other central banks may ease further to prod their currencies lower. BoJ Governor Kuroda last morning warned of further easing and while the RBA left policy steady as expected, it made clear it is unhappy with the recent AUD rally. Casting aside criticisms from the US, the RBA stated that “under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy”. We expect AUD/USD to weaken to 0.73 on a 3 mth view.” For more information, read our latest forex news.