The G7 meetings over this weekend will be important in assessing the degree of opposition within Europe and the US to further dollar losses.

There will be discussions over the dollar’s level against the Euro and it will be very difficult to form a consensus on the need for action to stabilise the US currency even though the French government will press for more decisive action.

The most likely outcome is that there will be tougher rhetoric on the need to avoid destabilising currency moves, but no indication of more serious measures.

If there is only limited rhetoric in support of the dollar, the US currency will be vulnerable to fresh selling pressure at the beginning of next week.

There is a small possibility that there will be a more substantive agreement to cap the Euro and sanction intervention if necessary, although this looks unlikely until there is evidence that the US housing sector is starting to stabilise. Finance ministers and central banks will be very reluctant to push hard against the underlying market trend as there would be higher risks of failure.

Europe and the US will find it much easier to agree that there should be increased Chinese currency flexibility and a stronger yuan. More aggressive rhetoric for Asian currency gains would provide near-term support to the Japanese yen.