Over the last two years, South Korea's overseas borrowings more than doubled, to $388 Billion. Nervous, perhaps, that Korean businesses may be overextending themselves, the government is seeking to regulate such activities. Based on the way the forex markets responded to the news, it must be perceived that borrowing abroad is helping the Korean economy. On the one hand, if loans are denominated in foreign currency and must then be converted to local currency, this would exert upward pressure on the Korean Won. On the other hand, this also requires more local currency to be printed, which fuels inflation. Much of the borrowings are being undertaken by shipbuilders who are trying to hedge their exposure to a rising Dollar. The Edge Daily reports:

Some analysts say the forward-trading-linked borrowing is not as big a problem as borrowing to fund consumption would be, but the government is worried that the sharp rise in debt over a short period of time could undermine the local financial system.

Read More: South Korea says not planning direct FX curbs

According to one index, commodity prices have risen 40% over the last twelve months. One would therefore expect the Canadian economy to be commensurately strong. According to the most current economic data, however, just the opposite is true. Wholesale manufacturing sales are down for the second straight quarter. Non-commodity exports are also trending downwards due to sustained economic weakness in the US, Canada's most important trade partner. Continued strength in the Canadian Dollar is also to blame. In addition, Canadians are traveling abroad in greater numbers, while international visitors to Canada have dwindled to record lows. As a result, Canadian GDP is expected to fall close to 0% for the second quarter, significantly below the Central Bank's goal of 1%. The Bank will likely respond with a series of rate cuts, perhaps totaling as much as 1%, intended to reduce buying pressure on the Loonie and ignite the economy. Canada.com reports:

"The loonie is rising, boosted by last week's energy and resource powered rise in the trade surplus as well as a positive interest rates spread."

Read More: Deeper rates cuts expected as Cdn. economy slumps

sOnly last year, the idea that the Australian Dollar would ever reach parity with the USD was laughable. Then, earlier this year, it became plausible. Now, according to an informal poll of analysts, it is not only possible, but likely. AUD bulls should look no further than the rapid surge in commodity prices, which may boost the total value of Australian exports by 20%, including a 30% rise in its commodity exports. In short, the Australian economy has boomed, and inflation is slowly creeping up. The consensus among economists is that the Royal Bank of Australia will leave its benchmark lending rate unchanged at 7.25% for the duration of the year. At the very least, it won't lower rates, which is all analysts need to believe in order to get behind its currency. Bloomberg News reports:

"There could be some parity parties going on,'' said a currency strategist in Sydney at RBC, a unit of Canada's largest bank. "The RBA...[has] given a green light for the market to push the currency higher."

Read More: Australian Dollar to Equal U.S. Dollar, Analysts Say

Raise your hand if you've ever heard of the Hungarian Forint.  I didn't think so.

The Forint is Hungary's currency, and it is performing quite well, having surged 2.5% against the Euro this month alone en route to a three-year high. The currency's rise can be ascribed to a combination of technical and fundamental factors. On the technical side, the Forint is nearing 240 per Euro which represents the top end of the band within which it was previously permitted to fluctuate. [This band was dissolved by the currency board in February]. According to analysts, a large quantity of options contracts were fitted with a strike price of 240, which is causing the Forint to accelerate as it nears this important barrier. On the fundamental side, Hungary has burnishing its inflation fighting credentials by raising its benchmark interest rate to 8.25%, convincing investors that it is serious in its efforts to maintain price stability. Political uncertainty and a minority government are working against the Forint, but these factors pale in comparison to inflation. The Guardian reports:

Gyula Pleschinger, currency strategist at Morgan Stanley believes the currency will firm further as it was significantly undervalued relative to regional peers.

Read More: Hungarian forint may test all-time highs

While the credit crisis has ravaged the economies of the US and the UK, the EU has largely been spared. First quarter GDP grew at a healthy annualized rate of 2.8%, helped by a whopping 6% expansion in Germany. However, a number of economic indicators now suggest that all is not well on the European front. Business and consumer confidence indexes are trending downward. Manufacturing output is down. So are retail sales. Spain, which benefited the most during the credit boom, is now reaping the greatest losses during the crunch, and could put a drag on the entire Euro-zone. One prominent economist is predicting that the EU economy won't expand at all in the second quarter.

Unfortunately, the only data point which is trending upwards is inflation. Even though the EU is much more efficient than the US in terms of its use of oil, record oil prices (as well as food prices) are taking their toll. As a result, the European Central Bank cannot (or will not) lower interest rates until price inflation returns to a more palatable level. Accordingly, EU member states are taking matters into their own hands by unveiling economic stimulus plans and tax cuts. As far as the Euro concerned, the ECB's focus on price stability (at the expense of growth) is not hurting the common currency, although if the economy really tanks, the story could change depending on concurrent circumstances in the US. The Economist reports:

The ECB has a strict remit to keep inflation in check, so rising commodity prices are likely to keep interest rates high, lending further support to the euro.

Read More: The euro-area economy - Too good to last

In its semiannual report to Congress, the US Treasury Department once again did not cite China as a currency manipulator. For as long as the Forex Blog has been covering this issue, various interest groups have been pressing the Bush administration on this issue, since the label of currency manipulator would entitle Congress to level punitive trade sanctions. The premise of their argument remains that an artificially cheap RMB is responsible for the decline of the US manufacturing sector and the burgeoning trade deficit, which topped $250 Billion in 2007.

The Treasury Department, under the leadership of Henry Paulson, insists that the best way to handle the situation is through dialog. In its report, it noted that the RMB has already appreciated over 18% since China's government revalued it in 2004. However, with the Presidential election looming, the RMB could become a major political issue. Already, both Hilary Clinton and Barack Obama have announced their intention to co-sponsor a bill that would impose trade sanctions on countries (i.e. China) that are deemed to undervalue their currency. In the end, politicians will continue to whine in vain to appease their constituents, and the RMB will continue climbing at its brisk, current pace of 7% per year.

Read More: US declines to cite China as a currency manipulator

Yesterday's release of the minutes from the Federal Reserve Bank's April meeting sent shock waves through the investing community. The text revealed that the Fed Board of Governors has become significantly more bearish on the outlook of the US economy, as compared to sentiments expressed at the January meeting. The consensus forecast covering 2008-2009 worsened for all of the major economic indicators, including GDP growth, inflation, and employment. If the low end of the new GDP estimate ultimately obtains, the US economy will expand by only .3% for 2008. Fed officials went so far as to say that even by 2010, they don't expect rates of inflation and unemployment to return to acceptable levels. To make matters worse, the minutes revealed some opposition to the 25 basis point rate cut that was implemented at the April meeting, on the basis of inflation concerns. The minutes further confirmed that the Fed does not plan to cut rates any further, for fear of stoking price inflation and fomenting another asset bubble. The Wall Street Journal reports:

In a speech Wednesday, Fed Governor Kevin Warsh said the central bank now must look to financial institutions to raise capital and take other actions to improve market functioning.

Read More: Fed's Forecast Grows Gloomier

After the G7 meeting, during which officials finally commented on the "volatility" in forex markets, the Dollar rapidly appreciated over 5%. Analysts had previously ascribed this rally to a variety of factors, both technical and fundamental. For example, the Dollar was oversold. The EU economy is faring worse than the US economy. The interest rate differential has stabilized and may favor the US in the medium-term. The Dollar will remain the world's reserve currency through the duration of the credit crisis.

Recently, a new theory has begun to circulate- that US officials are prodding large holders of USD assets to support the Dollar, because a strong Dollar is conducive to global price and economic stability. The rumor was sparked by comments made by high-ranking officials in the EU and US governments, suggesting that the Bush administration is finally putting some force behind its "Strong Dollar" policy. Specifically, it has been speculated that the BRIC countries (Brazil, Russia, India, China) have been requested to stop diversifying their forex reserves away from Dollars. Some have speculated further that the Fed may directly intervene in forex markets, a move which would be supported by the Dollar's upward momentum. Marketwatch reports:

"The G-7 would be smart to consider a strong intervention effort geared at pushing speculators toward their pain threshold."

Read More: Dollar rally, leaks put fresh focus on G7 meetings

In the early months of 2008, the Icelandic Krona continued its downward slide, ultimately losing 26% of its value. Inflation is nearing 12%, the economy is in tatters, and there is a crisis of confidence affecting the banking sector. Having already raised interest rates to 15.5%, the Bank of Iceland was out of options. Perhaps out of concern that the turmoil in Iceland would spread to continental Europe, the Central Banks of Norway, Sweden, and Denmark were impelled to act. Their assistance took the form of a swap agreement, which provides Iceland with access to €1.5 Billion in emergency funding.

As soon as the news broke, the Krona appreciated nearly 5%, as some semblance of confidence in the country's still-fragile banking sector was restored. Despite the emergeny funding, Iceland is far from being in the clear. The country's national debt remains problematic, as evidenced by a recent downgrading of its credit score. If Iceland were ever to make use of the funds covered under the swap agreement, investors would probably rush for the exits and send its currency on another downward spiral. The New York Times reports:

Iceland, a country accustomed to booms and busts, probably cannot escape an especially painful adjustment this time, as it digests years of heavy borrowing from abroad. Public and private economists differ mainly on the length and depth of the contraction.

Read More: 3 Nordic Banks Help Iceland Prop Up Currency

The Australian Dollar is rapidly approaching parity with the USD, having risen 12.8% in the year-to-date. In fact, it recently notched a 24-year high against the Dollar. The currency's strength is connected closely with the US-Australia interest rate differential, which currently measures a whopping 5%. While the Australian Dollar has always been a favorite target of carry traders, it has received a special boost from the easing of US monetary policy, which has turned the Dollar into a funding currency. The New Zealand Kiwi has also performed well, thanks to a benchmark interest rate of 8.25%. However, New Zealand rates are probably headed downwards, whereas the consensus for Australia is for rates to remain at current levels, or even to rise, depending on inflation. Bloomberg News reports:

Board members decided to leave the rate at 7.25 percent because of "the substantial tightening" in financial conditions since mid-2007 and "uncertainty surrounding" the outlook for economic growth and inflation.

Read More: Australian Dollar Rises to 24-Year High on RBA Meeting Minutes