Politics & Policy

Since even before the dawn of the Forex Blog, commentators have been speculating that the US Treasury Department would officially brand China as a "currency manipulator" in its semi-annual report to Congress.  Such a label is important because it would enable the US to levy tariffs and other economic penalties against China.  However, another report has been issued, and one more time the Treasury Department glossed over China’s de facto control over the Yuan. The report did criticize China for failing to appreciate the RMB rapidly enough, since the 12% gains it has racked up over the last two years have been largely offset by inflation.  The report also referred to China’s widening trade surplus and accompanying growth in foreign exchange reserves.  US politicians, however, are less than pleased, and are preparing to take matters into their own hands.  The Associated Press reports:

"In refusing to brand China as a currency manipulator, which is so
obvious, the Administration gives Congress no choice but to act on its
own. This report is the strongest case possible for our legislation,"
said [one high-ranking Senator] Schumer.

Read More: US stops short of accusing China of currency manipulation

Hook

Original post by Jimmy Atkinson and software by Elliott Back

The Organization for Economic Cooperation and Development
(OECD) recently issued a report on the Chinese Yuan, which thoroughly assessed
the currency’s appreciation since it was “revalued” over two years ago.  While the Yuan has technically risen over 10%
against the USD, the OECD concluded that in real terms, the currency has
actually fallen. The official rate of inflation
hit 6.5% this year, and international economists reckon the true figure is
probably much higher. Furthermore, the
government recently revised its estimate for full-year GDP growth to 11.4%,
which means price levels may rise further, eating into the real value of the
RMB.  In fact, the OECD estimates that
the Yuan remains undervalued by as much as 40% and views the “solution” as a
combination of tighter monetary policy and looser exchange rate policy.  The Associated Press reports:

While the report did not directly criticize China’s
foreign exchange controls, it noted that efforts to tighten money supply to
counter inflation were not having much impact.

Read More: OECD Says China Grip on Yuan Too Tight

Original post by Jimmy Atkinson and software by Elliott Back

Despite, or perhaps because of the appreciating Yuan, China’s trade surplus with the US is growing by 50% on an annualized basis, and is set to surpass $250 Billion for the year.  In theory, the more expensive Chinese currency should reduce US dependence on Chinese exports and narrow the trade imbalance.  In practice, the US is actually importing a greater quantity of goods and services from China and is also paying higher prices because of the appreciating Yuan.  Ironically, the US Treasury Secretary is scheduled to discuss this matter with his Chinese counterpart next week, and is expected to pressure China to appreciate the RMB even faster against the Dollar. Unfortunately, China’s hands are partially tied as a result of an agreement it already signed with the EU, under which it promised to appreciate the RMB against the Euro. Bloomberg News reports:

Under the current regime, the yuan is allowed to move as much as 0.5 percent against the U.S. dollar every day, from the previous limit of 0.3 percent. "There will be a broadening of the trading band again in the next few months," said one analyst.

Read More: China Trade Surplus Probably Held Near Record, Fueling Tension

Original post by Jimmy Atkinson and software by Elliott Back

Unnerved by the tremendous appreciation in its nation’s currency, Canada’s Parliament is officially mulling the possibility of pegging the Loonie to the USD.  It’s unclear at what value the two currencies would be linked, perhaps at parity.  However, in testifying before Parliament, the future leader of the Bank of Canada argued staunchly against such an exchange rate regime.  Such a relationship, he warned, would cripple Canada’s ability to conduct monetary policy, independent of the US.  So long as the Loonie remained fixed to the Dollar, Canada would be forced into mirroring US interest rate movements.  Because of several fundamental differences in their respective economies, it seems unlikely that this policy will be implemented. The CanWest News Service reports:

"It would mean that, de facto, Canada would adopt U.S. monetary policy, despite the reality that the structures of our economies are very different and, as a consequence, often require different types of adjustments in response to global developments."

Read More: Carney under fire for role in income-trusts decision

Original post by Jimmy Atkinson and software by Elliott Back

The Petrodollar phenomenon, analyzed recently by the Forex Blog, is now beginning to play out in real time. Last week, several high-ranking officials from the government and Central Bank of Bahrain, a small Mid East island-nation, publicly criticized the region’s collective policy of pegging their respective currencies to the USD. As a result of this and similar comments by officials from nearby countries, a flood of speculative capital has poured into the country as well as the region at large, betting that a change in the forex regime will take place as soon as next week. Now, countries such as the Bahrain are on the defensive, trying to hold down their currencies until a decision can be made. The Economic Times reports:

“Their speculation will not yield the gains they expect.” Bahrain’s central bank threatened to take action against anyone betting on dinar appreciation and accused foreign banks of spreading revaluation rumours.

Read More: UAE warns markets against betting on dirham revaluation

Original post by Jimmy Atkinson and software by Elliott Back

Earlier this week, we reported that the members of OPEC are
mulling the possibility of pricing oil contracts in a basket of currencies,
rather than solely in Dollars.  In a
related move, the members of the Gulf Co-operation Council (GCC) are also
rethinking their exchange rate policies. Currently, the members of the GCC, consisting of United Arab Emirates (UAE),
Saudi Arabia, Kuwait, Qatar, Oman and Bahrain, all currently peg their
respective currencies to the Dollar, in some form or another.  However, this policy is being scrutinized as a
result of the falling Dollar, which has dragged down GCC currencies
proportionately and triggered double-digit inflation.

In fact, Kuwait
has already de-linked its currency from the USD and instead pegged it to a
basket of currencies, so as to give it more flexibility in conducting monetary
policy.  This represents the most likely
course for the rest of the GCC, since it would allow them to maintain exchange rate
stability while increasing their flexibility in conducting monetary policy.  This policy change, combined with the
potential switch in oil pricing among OPEC nations, bodes ill for the
Dollar. At the very least, it would
result in decreased demand for USD and for Dollar-denominated assets. At worst, it would result in active
diversification, of rotating foreign exchange reserves into assets denominated
in other currencies, to support the new peg.

Read More: Countdown to lift-off

Original post by Jimmy Atkinson and software by Elliott Back

Currency traders who have done their homework are no doubt
well aware that one of the countervailing forces to the Dollar’s decline is the
so-called petrodollar phenomenon.  In
short, because oil contracts are settled in USD, the global demand for USD is
held artificially high.  However, due
primarily to the rapid decline of the Dollar, the members of OPEC are studying
the feasibility of pricing oil in terms of a basket of currencies, rather than
solely in terms of Dollars. This
proposal is still in the earliest stages of planning, and it’s not yet clear
exactly how it would work.  One thing is certain: if such a change were
implemented, the decline of the Dollar would accelerate.  OPEC is scheduled to hold several high-level
meetings over the next month, which should produce further developments. Reuters reports:

Venezuela’s
Energy Minister Rafael Ramirez said…“The need to establish a basket of
currencies … will probably be a point of discussion in the next OPEC summit.”

Read More: OPEC to study currency basket for pricing

Original post by Jimmy Atkinson and software by Elliott Back

Yesterday, we posted about the Central Bank of Australia, which intervened on behalf of its currency over the summer. In fact, several Central Banks have either intervened or are in the process of intervening, all with the goal of holding their currencies down (against the US Dollar) rather than lifting them up, as Australia had effected to do.  Columbia has already imposed strict rules governing the inflow of foreign capital, intended to discourage speculation, which is driving up the South American nation’s currency.  Indian regulators have since followed suit with similar rules.  South Korea’s Central Bank, meanwhile, is using slightly different tactics, undertaking a review of forex forward contracts, which it believes (probably erroneously) are interfering with its ability to hold down the Korean Won.  Bloomberg reports:

"Central banks are trying noninterest rate methods to stabilize growth and capital flows.  It’s something extraordinary. They haven’t used these venues for a long time. It’s sort of the last resort the central banks would like to tap."

Read More: Currency Controls Return as Central Banks Fight Gains

Original post by Jimmy Atkinson and software by Elliott Back

This week, the Central Bank of Hong Kong intervened in forex markets for the first time in nearly two years, by purchasing over $1 Billion in US government securities.  The intervention was precipitated by fluctuation on the HK Dollar, which had been tending towards the upper end of its tightly controlled trading band.  Strength in the HK economy combined with a strong performance in HK capital markets have sucked large amounts of foreign capital into the Chinese-controlled city-state, which exerted upward pressure on its currency.  Hong Kong’s Central Bank also matched the recent rate cut by the Fed with a rate cut of their own.  Many analysts had put forth the idea that Hong Kong would scrap its peg when the Chinese Yuan slid past it, but this recent move suggests the Dollar peg is here to stay.  The Financial Times reports:

Joseph Yam, HKMA chief executive, said on Thursday: “We again reaffirm that the [Hong Kong] government has been clear in its financial policy and is committed to maintaining the peg.”

Read More: Hong Kong to stick with US dollar

Original post by Jimmy Atkinson and software by Elliott Back

You have to admire the US for its persistence in pressuring China to appreciate the Yuan,
though it’s not as if anyone seriously expected it to back off. Fresh from the recent
G8 conference and enjoying the spotlight of the media, US Treasury Secretary
Hank Paulson called in China to put its money where its mouth is, and relax its hold on the Yuan. Paulson expressed
dissatisfaction with the pace at which the Chinese currency has appreciated-
approximately 10% since 2005.  He even
insinuated that there would be repercussions for the US-China trade
relationship if this demand was not at least partially fulfilled.  To add insult to injury, he warned that US public opinion of China is already at a low point, in
the wake of the quality control issues with Chinese exports and the subsequent
recalls.  Reuters reports:

“While we are trying to lower barriers to trade, there is a
risk that some in China are
stepping away from long-standing policies of closer global economic integration
– policies which have been a source of

China’s incredible growth.”

Read More: Paulson wants faster China yuan rise

Original post by Jimmy Atkinson and software by Elliott Back

In an official G7 press release, US Treasury Secretary Henry
Paulson proclaimed that the US
would continue to pursue a “Strong Dollar” policy. While this remark was certainly anticipated
and probably even appreciated, by representatives from the EU, analysts have
been quick to mock. Their point, which
is well-taken, is that it seems ridiculous for the US to insist that it supports a
strong Dollar when economic fundamentals support a continued decline. The current account deficit is not
retreating, interest rates are being lowered, and the credit crunch threatens
to collapse the US housing and stock markets. Meanwhile,
the USD has declined in five of the last six years, and the Bush administration
has not made any serious efforts (beyond rhetoric) to intervene on its behalf,
leaving market participants chuckling and scratching their heads when they hear
“Strong Dollar.” Reuters reports:

Paulson even before he became Treasury secretary said
publicly that the dollar would have to weaken to ameliorate the U.S. trade
shortfall. So his maintaining a strong-dollar policy may reflect a more global perspective…

Read More: Markets see U.S. policy of "ignore the dollar"

Original post by Jimmy Atkinson and software by Elliott Back

At last week’s G8 meeting in Washington, it was expected that currencies would be a hot topic of discussion.  With the Dollar retreating to record lows on a daily basis, the failure of China to allow the Yuan to appreciate, the Japanese Yen’s continued weakness despite its strong economy, and the recent parity of the Canadian Dollar and USD, there are certainly plenty of forex phenomena that deserve attention.  However, it is the Euro/USD relationship that probably received the most scrutiny, as the biggest contingent of the G8 uses the Euro.

European politicians and bureaucrats have spent the last few months arguing with America-as well as amongst themselves-over the declining Dollar.  The consensus is certainly that the Dollar is harming the European economies; as one German Minister phrased it, the “pain threshold” has been crossed.  At the same time, it is clear that a relatively weak Dollar is probably in the best interest of global economic stability, since the US current account and financial account imbalances can only be solved by changes in exchange rates.  Thus, there is a growing divide between European politicians, who tend to think in provincial terms, and the European Central Bank, which is more focused on the Big Picture.  The new President of France, for example, has been quite vocal in lamenting the appreciation of the Euro, even going so far as to demand the ECB step in.  Jean Claude Trichet, president of the ECB, responded by calling on European politicians to be circumspect in their comments on the Euro.

However, since Central Banks do not participate in G8 conferences, you can bet that politicians hounded Hank Paulson, US Secretary of the Treasury, on the declining Dollar.  Some analysts have even speculated that ‘intervention’ would enter into the discussions. In fact, the US has not intervened in forex markets since 1994, when Europe and American worked in tandem to prop up a then-ailing Dollar.  After a couple months, however, the plan was abandoned due to mixed results.  Is it possible that the US, confronted with the same situation, will once again attempt intervention?

The answer is “not likely.”  First, the Europeans are not even united in their position on the USD/Euro exchange rate.  Secretly, they would probably all prefer a stronger Dollar, but in public, only a handful have called for intervention.  Second, short of fixing the exchange rate (which would require the US to borrow money), it is very difficult for a government/central bank to control its currency.  Recent intervention by South Korea and Japan, as well as America’s efforts in 1994, ended in failure. Finally, there is the issue of China, which does control its currency.  The US would surely appear hypocritical if it intervened on behalf of the Dollar while simultaneously encouraging China to float the Yuan.  Thus, while certain US economic concessions may result of the G8 conference, a controlled appreciation of the Dollar will not likely be one of them.

Original post by Jimmy Atkinson and software by Elliott Back

Rodrigo Rato, outgoing president of the International Monetary Fund ("IMF") recently offered his two cents on developments in the forex markets.  He began by cautioning against "excessive volatility," or the rapid fluctuations which have recently afflicted many of the world’s major currencies.  Next, he suggested that the Dollar has moved from being massively overvalued to being massively undervalued. In other words, it is his assessment that the Dollar has depreciated far too rapidly over the last few years.  Finally, he suggested that a tightening of Japanese monetary policy would be in the best interest of global economic stability.  As Rato is no doubt aware, higher Japanese interest rates would put an end to the carry trade, and drive the Yen upwards in value.  The Financial Times reports:

The outgoing IMF chief also hints at unease about Japan’s yen, which remains weak in part because of ultra-low interest rates. “Normalisation of monetary policy in Japan is an important medium-term objective.”

Read More: Rato speaks his mind on dollar

Original post by Jimmy Atkinson and software by Elliott Back

Friday is looking up for risky currencies, as President Bush will announce a plan to help US  homeowners who are at risk of defaulting on their mortgage loan. This has eased the concerns of many forex traders who have been resting their money in low-yield currencies like the yen. Now, with the subprime mortgage issues being addressed by the US government, high-risk investments will resume. Reports Reuters:

"There is some reaction to Bush’s plans to help out people
who are in trouble with their mortgage payments and markets are
also expecting some comments from Bernanke this afternoon
regarding rate cuts. Both these factors are helping the carry
trade," said Carsten Fritsch, currency strategist at Commerzbank
Corporates & Markets in Frankfurt.

Read more: High yielders recover ahead of Bush, Bernanke

Original post by Amy Cottrell and software by Elliott Back

The U.S. Central Bank voted unanimously to hold interest rates steady on Tuesday, resisting pressure from Wall Street calling for an rate cut. The federal funds rate has now been at 5.25% for over a year. The Fed feared that a rate cut would only do more damage to the USD, which is already weak overseas. According to the Chicago Tribune:

About the only consolation for financial markets was the fact that the
central bank at least mentioned these concerns in a statement after its
meeting. That acknowledgment gave Wall Street faint hopes of an
interest-rate cut later this year if credit conditions continue to
deteriorate.

Tightening credit, combined with a continuing
housing correction, have slammed stock prices over the past weeks. A
high level of volatility has signaled to many that the bull market is
over and that the credit crunch could be worse than believed.

Read more: Central bank holds line on interest rates

Original post by Jimmy Atkinson and software by Elliott Back

With the Euro handily outperforming the USD, Japanese Yen
and certain other major currencies, many EU leaders have begun lamenting the
impact they foresee on the EU economy. As most amateur economists are doubtlessly aware, however, there is a
tradeoff between control over one’s currency and control over one’s domestic
economy. In other words, if the EU acted
in concert to hold down the value of the Euro, the ability of the European
Central Bank to conduct monetary policy would be severely constrained. Accordingly, Jean-Calude Trichet, President
of the ECB, is insisting that any efforts directed towards holding down the
Euro be political, rather than economic in nature. Surprisingly, he is not opposed to EU
political leaders holding talks with their Japanese and possibly American counterparts
to discuss the growing perceived “misalignment” between the Euro and the
Dollar. The Financial Times reports:

Mr Trichet had made it very clear in his comments to the
European Parliament last week that there should be a dialogue between European
countries and their partners over currency matters.

Read More: View of the day: Currency misalignment 

Original post by Jimmy Atkinson and software by Elliott Back

Since it was freed from its fixed exchange rate regime two
years ago, the Chinese Yuan has appreciated nearly 9% against the USD. While the Yuan’s exchange rate is clearly
managed by the Chinese government, many commentators agree that its rise has
given off the aura of a floating currency. One economist thinks China will cement this perception the conclusion of
the Beijing Olympics-to be held in 2008-and allow the currency to float freely,
at which point it could surge by as much as 10% against the USD. Evidently, China is growing tired of the
lack of control it has over its domestic economy due to its exchange rate
policy and is clearly overwhelmed by the need to continue growing its forex reserves
(which now stand at $1.33 trillion) in order to control the Yuan. Bloomberg News reports:

“They have to adopt a free-float system; it’s not a question
of whether they will, but a question of when. After the Olympics, the new
leadership will be firmly in place.”

Read More: Yuan May Trade Freely
After Olympics, UOB’s Suan Says

Original post by Jimmy Atkinson and software by Elliott Back

The political furor surrounding the soaring Euro is reaching
fever pitch, as European politicians clash with central bankers over the role
of the state in determining exchange rates. Jean-Claude Trichet, President of the European Central bank (“ECB”) has
argued that the Euro should be valued strictly by the markets. Politicians from EU-member states, on the
other hand, have frequently argued that the surging Euro is hampering economic
growth and should be used as a tool in economic policy-making. The newly-elected president of France,
Nicolas Sarkozy, has been a vocal critic of the ECB, arguing that the Euro
should actively be held down. The
Financial Times reports:

In contrast to the
US and Japan, where the finance ministry sets the exchange rate regime and
intervenes in exchange markets, eurozone central banks hold and manage foreign
exchange reserves and have responsibility for any market intervention.

Read More: ECB takes aim at Sarkozy over euro

Original post by Jimmy Atkinson and software by Elliott Back

Earlier this week, the Chinese Yuan recorded its highest one-day increase in value in the two years since it was famously revalued against the Dollar.  The currency rose nearly .4% and prompted renewed speculation that China’s Central Bank will either widen the trading band to .8% or will generally allow the currency to appreciate faster.  In fact, the political and economic consensus continues to maintain that the Yuan is not appreciating rapidly enough.  While it rose over 6% against the Dollar, for example, it actually lost value to several of the world’s major currencies.  Furthermore, its decline against the Dollar is less impressive when China’s skyrocketing inflation rate and burgeoning trade surplus are taken into account.

There are still a few analysts who are bucking the trend and arguing that the Yuan is fairly valued.  This notion is supported by a recent World Bank analysis, which updated its calculation of China’s purchasing power and reduced its PPP-equivalent GDP in the process. However, this opinion is echoed by only a small group of analysts, and an overwhelming majority continues to call for and anticipate a further appreciation of the Yuan.  Bloomberg News reports:

Forward contracts show traders are betting on an 8.7
percent advance in the yuan to 6.7344 per dollar in the next 12
months. The median estimate of 28 analysts surveyed by Bloomberg
News is for a rate of 6.88 by the end of 2008.

Read More: Yuan Rises Most Since End of Peg as China Seeks to Curb Prices

Original post by Jimmy Atkinson and software by Elliott Back

In Venezuela, the inflation rate for 2007 is estimated at 20%, a slight increase over the 17% growth in prices that was observed in 2006.  The nation, led by Hugo Chavez, plans to deal with inflation by dropping a few zeros from the currency’s exchange rate.  Currently, the official exchange rate is 2,150 Venezuelan Bolivars for every US Dollar.  Under the revaluation, the new official exchange rate will become 2.15 Bolivars/USD.  Critics charge that the change will not have any impact on inflation, especially since the market exchange rate implies a Bolivar that is three times less valuable than government rates.  Chavez retorts that the revaluation is only one part of a broader, more sophisticated strategy.  Down Jones reports:

The Central bank president had earlier in the year
said the effect on inflation would be neutral, and most economists
agree, but [Finance Minister] Mr Cabezas said "it’s definitely going to have a positive
effect" on the government’s fight against price increases.

Read More: Chavez drops zeros to fight inflation

Original post by Jimmy Atkinson and software by Elliott Back

Recently, most of the news regarding the Dollar has, frankly, not been positive.  The housing crisis is beginning to take its toll on the broader economy.  The Fed is planning to lower interest rates at its next meeting, which will eliminate the positive differential with Euro-zone rates.  High commodity prices are driving inflation and eroding the value of the Dollar.  But today, the news was good- at least as far as the USD is concerned.  The Wall Street Journal leaked a document from the Bush Administration that mentioned tax cuts for households and businesses.  The aim of the tax cuts, ideology notwithstanding, is to provide a stimulus for the reeling economy.  As they say, what’s good for the US economy is good for the Dollar.  Reuters reports:

"Given the market’s perception that a (U.S.) recession is
looking increasingly inevitable, tax cuts and any stimulus
measures offered by the authorities will obviously bode well
(for risk appetite) … It’s more positive for the dollar
because there is a sense that it may help avoid a recession."

Read More: Prospect of US tax cuts boosts FX risk appetite

Original post by Jimmy Atkinson and software by Elliott Back

2008 is still in its infancy, which means the self-proclaimed forex experts can be excused for offering their projections on what the year has in store for the Dollar.  If currencies were traded in a vaccum, the Dollar would probably trend upward, since many technical factors suggest it is oversold.  From a fundamental standpoint, however, it is probably overvalued, per the laws of interest rate parity and purchasing power parity.  Relative to other countries, though, it may be undervalued.  From this standpoint, argue some analysts, the biggest impetus for a Dollar upswing will come not from good news emanating from the US, but rather from bad news emanating from the rest of the world.  For example, the British economy, balance of trade, and monetary policy outlook is even more bleak than the US.  The CEO of Airbus, one of the EU’s most important companies, has threatened to shift production away from the EU if the Euro remains expensive.  Finally, the Central Bank of China is allowing the Yuan to appreciate at a faster pace against the Dollar.  As far as Dollar bulls are concerned, it might be best if the US government simply sits tight. The BBC reports:

"A lot of bad news is already priced into the dollar.
It’s elsewhere that the shocks could come from, perhaps from the
European Central Bank, or the Bank of England."

Read More: 2008 - the return of the dollar?

Original post by Jimmy Atkinson and software by Elliott Back

On January 24 last year, the Forex Blog reported with great fanfare that China’s forex reserves had breached the epic milestone of $1 Trillion. [In hindsight, it turns out that the psychologically important barrier was broken several months earlier, but that is beside the point].  Less than one year later, China’s forex reserves reached another important threshold, soaring past $1.5 Trillion. It appears that new reserves are being accumulated at  an exponential rate, having increased $460 Billion last year and over $30 Billion in the month  of December alone. By no coincidence, China’s 2007 trade surplus of $262 Billion shattered the previous record and is expanding at a comparably supersonic pace.

Most analysts reckon that the country is locked in a vicious cycle: when its trade surplus grows, its forex reserves grow proportionately. Moreover, the lopsided trade imbalance th\at China maintains with most of the world ensures that the demand for Chinese Yuan exceeds the supply. In the short run, a more expensive currency equates to higher prices paid for its exports which only increases the trade surplus and forex reserves further, and exerts still more pressure on the currency to appreciate.  Meanwhile, as the Yuan rises, the value of China’s forex reserves, which are denominated predominantly in USD, falls.  What a conundrum indeed! Xinhua News reports:

The value of Chinese RMB against the US dollars has appreciated by over six
percent in 2007. The central parity rate of the RMB was 7.2672 to the
US dollar on Friday.

Read More: Forex reserve tops $1.53 trillion

Original post by Jimmy Atkinson and software by Elliott Back

In a recent editorial published in the Wall Street Journal, the Chief Economist for Bear Stearns (an American investment bank) advocated intervention by America’s Federal Reserve Bank on behalf of the Dollar.  He reasons that the best way both to fight and inflation and alleviate the possibility of recession is to strengthen the USD.  Current measures, which include lowering the discount rate and manipulating the money supply, are actually worsening inflation.  As a result, institutional investors are moving their capital en masse outside the US in order to prevent the declining dollar from corroding their investment returns. While paying lip service to the prevailing wisdom that Central Banks are essentially impotent when it comes to managing currencies, he insists that strong rhetoric by the Fed could conceivably convince investors that it stood behind the "Strong Dollar Policy" it promotes.  The Wall Street Journal reports:

By saying they want a stronger dollar, the Fed…could make it happen. Government policy makers have almost
absolute control over perceptions of the future scarcity of dollars.
This controls the demand for dollars almost as much as it does the
supply, setting its value as much or more than rates do.

Read More: Markets and the Dollar

Original post by Jimmy Atkinson and software by Elliott Back

When Henry Paulson was appointed Secretary of the US Treasury last year, he made China and its purportedly undervalued currency a cornerstone of his economic plan. Lo and behold, several months ago, the Yuan suddenly accelerated in its upward path against the Dollar, rising at an annualized rate of 14%. Currency futures are now pricing in an 8% rise in 2008, while several economists are forecasting a 10% increase.  Ironically, there are still American policymakers who think the Yuan is appreciating too slowly, as well as Chinese policymakers who reckon it is increasing too rapidly.  Accordingly, the current pace probably represents a fair compromise.  Besides, inflation is threatening the US, so a slow appreciation would enable the economy to adjust to higher prices in the long term.  While China also faces rising inflation, it doesn’t want to send investors the message that the movement of its currency is uni-dimensional, which would encourage further inflows of speculative capital.  The Economist reports:

But Chinese policymakers have stressed the need for gradual adjustment.
To show that the currency is not just a one-way bet, the PBOC may try to nudge the yuan a bit lower in coming days.

Read More: Revaluation by stealth

Original post by Jimmy Atkinson and software by Elliott Back

In its annual meeting, the G7 virtually ignored the situation in forex
markets.  In previous years, the G7 used the so-called "communique,"
which essentially functions as a summary of the meeting, to rebuke
China for not allowing the Yuan to appreciate at a satisfactory pace.
This year, the RMB has appreciated markedly- by 9% on a trade-weighted
basis- and thus, the G7 opted not to apply further rhetorical
pressure.  In addition, several of the most prominent EU member states
had hoped to work a discussion of the Dollar into the communique, but
alas, any mention was notoriously absent. Analysts have speculated that
this is due both to America’s political indifference towards the
valuation of the Dollar as well to a disagreement over what the correct
valuation should be, if indeed it is undervalued. Thomson Financial
reports:

"It was clear a few days ago that there was going to be no change in
the (currency section) of the communique and that really spoke of a
lack of consensus about mainstream currencies."

Read More: China spared ritual lambasting as yuan slips down G7 agenda

Original post by Jimmy Atkinson and software by Elliott Back

The Israeli Shekel has surged over 15% against the Dollar in the last six months, and by over 20% in the last two years. Analysts have suggested that the appreciation is due to the strength of Israeli’s economy vis-a-vis the US economy, which seems headed for recession.  In addition, Israeli citizens have repatriated billions of dollars in capital that had been held overseas and invested it in Israel’s financial markets, which in itself, has exerted much of the pressure on the Shekel.  There is now a surplus in the balance of payments, which means more capital is coming in to Israel than is being taken out.  As a result, Israeli exporters are getting nervous about the perceived consequences of a relatively expensive currency and are pressuring Israeli political leaders to take action.  The Central Bank, understandably, is reluctant to do so. Haaretz.org reports:

"Intervening in [the currency] market is risky and inefficient," [said] Bank of Israel Governor Stanley Fischer…earlier this week.

Read More: Dollar falls as Fischer says won’t intervene in currency market

Original post by Jimmy Atkinson and software by Elliott Back

China’s trade surplus grew 22.6% year-over-year for the month of January, on top of export growth of 26.7%.  If there is any silver lining to what many policymakers would consider bad news, it is that growth in imports is slightly outpacing growth in exports.  Unfortunately, that is unlikely to allay the critics, and there are still many of them. The argument remains unchanged- that China is not allowing its currency to rise fast enough.  On paper, however, the Yuan has appreciated by 15% since China officially de-pegged it from the Dollar in July 2005.  In addition, the G7 failed to scold China in its annual meeting, which suggests that economic policymakers are becoming less concerned with China’s forex policy.  Ironically, the revaluation of the Yuan is probably boosting the value of of China’s exports in the short-term, because other countries are now paying more for the same quantity of imports.  AFP reports:

The International Monetary Fund…urged the Chinese
government to loosen the reins on the yuan. "We encourage a
faster pace of appreciation that would be helpful for addressing
China’s key economic challenges and would also contribute to preserving
global economic stability."

Read More: China’s trade surplus rises 22.6 percent in January

Original post by Jimmy Atkinson and software by Elliott Back

Every month seems to witness the induction of a new country into the pantheon of those with burgeoning forex reserves.  The new member for the month of February is…Iran?  Most of the attention Iran receives is political rather than economic, but with oil prices recently topping $100 a barrel for the second time, you can bet that Iran will start appearing on the radar screens of more and more analysts.  Iran’s reserves currently total $76 Billion, which is unimpressive in itself, but represents a 30% year-over-year increase.  Of more significance, perhaps, is that Iran is leading the charge against the Dollar by actively diversifying its reserves into Euros. It remains to be seen whether any "non-rogue" countries will follow suit.  The Economic Times reports:

Iran, the world’s fourth largest oil
exporter and the second ranking in OPEC, has benefited from record crude prices
which have helped it to weather domestic economic problems.

Read More: Iran’s forex reserves top $76 bn

Original post by Jimmy Atkinson and software by Elliott Back

The three rules of monetary policy- goes the old adage- are inflation, inflation, inflation.  Well, maybe not.  But that is certainly the story in the Middle East; Saudi Arabia’s official inflation rate is the highest in 12 years, and Qatar and the UAE have witnessed double-digit percentage increases, in annualized terms. Since their currencies are pegged to the USD, however, their Central Banks are unable to raise rates accordingly, leaving them with a tough decision: allow the currency to appreciate or watch prices spiral out of control.  It is the same story being told in every developing country that pegs their currency to the Dollar, and the members of the Gulf Cooperation Council (GCC) are certainly not exempt. As the ranking member, Saudi Arabia will all but determine if and how the official forex policy changes.  An announcement could come any day. The Gulf Times reports:

Mohammed al-Jasser, Saudi Arabia’s deputy central bank governor, had said last month that the Gulf Arab states should maintain their currency pegs to the US dollar regardless of rampant inflation in the region or the impact of US rate cuts.

Read More: Saudi to mull forex policy as more US rate cuts loom

Original post by Jimmy Atkinson and software by Elliott Back