Category Archives: U.S. Dollar

22-Jan (The Wall Street Journal) — As financial heavyweights head to Davos for their annual alpine conclave, they might have expected some solace from the world’s markets, which are in much better shape than they were this time last year. Instead it seems they’ll be worrying about the possibility of currency wars.

Some have already started. Bank of England Governor Mervyn King told the Economic Club of New York in December that 2013 could be marked by widespread competitive devaluation, or “actively managed exchange rates” as he put it with central-banker nuance. In short he feared that national leaders would seek to boost their country’s economic growth by weakening its currency.

This gloomy prognosis already seems prescient. By Jan. 16 the deputy head of Russia’s central bank Alexei Ulyukayev felt moved to warn that we are now “on the verge of very serious and confrontational actions in the sphere, which is, not to get too emotional, called ‘currency wars’.” Not much nuance there.

…In Europe, Bundesbank President Jens Weidmann warned Japan Monday not to “politicize” the exchange rate with aggressive policy, reflecting mounting concern in Europe that Tokyo won’t be alone in doing exactly that.

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16-Jan (Bloomberg) — The world is on the brink of a fresh “currency war,” Russia warned, as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates.

“Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said at a conference today in Moscow.
Enlarge image Russia Says World Is Nearing Currency War as Europe Joins Battle

The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room. The risk is as each country tries to boost exports, it hurts the competitiveness of other economies and provokes retaliation.

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21-Nov (YahooFinance) — When it was released a year ago this month, James Rickards’ Currency Wars: The Making of the Next Global Crisis was widely hailed and quickly adopted as a guidebook of sorts for economic conservatives, Fed critics and gold bugs — especially gold bugs given Rickards’ support for a return to the gold standard.

Since the book’s release, the Federal Reserve has tripled-down on its policy of quantitative easing, effectively pledging to keep rates at zero indefinitely — or until the job market dramatically improves. Nevertheless, predictions of the dollar’s demise have proven unwarranted, or certainly premature. Among other issues, concerns about Europe’s debt crisis have driven global investors into the greenback, rather than fleeing from it as Rickards (among others) predicts.

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29-Oct (Chicago Sun Times) — The Chinese currency has taken center stage in some of the economic policy debates leading up to the election. That is because of the perception that China is the source of all our jobs woes as their economy continues to grow at a rate four times as fast as ours. The theory is that by keeping their currency artificially “cheap” against the dollar, it encourages America to import more goods from China — while encouraging job growth there to make all those products.

But this discussion of the Chinese currency leads to some interesting revelations of our general ignorance about Chinese currency, and our trading relationship…

… Both political parties have been critical of Chinese currency policies, which have facilitated cheap imports into the United States, and which subsidize manufacturing in China. Early in the Obama administration, there were strident calls to “do something” about the weak Chinese currency. And now Mitt Romney has said he would label China as a “currency manipulator” and act to raise tariffs on imports of Chinese goods into America.

It is ironic that these calls would come just as the RMB is growing stronger against the U.S. dollar. But it is even more ironic that both parties seem to be demonizing China in this election. After all, many of the dollars we send to China are used by their central bank to buy U.S. Treasury securities — helping us to fund America’s budget deficits at low-interest rates.

In fact, China now owns roughly $1 trillion of our $16 trillion national debt. If they stopped buying — or didn’t earn the dollars that they use to buy our debt — the United States might have to attract other buyers of our debt by raising our interest rates.

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PG View: For better or worse, we seem to have a ready and willing buyer of the Federal debt in our own central bank…

08-Oct (The Wall Street Journal) — Currency options prices, a barometer of expected volatility, have plummeted to prefinancial-crisis levels, in response to heavy stimulus measures by central banks around the world.

The potentially unlimited Federal Reserve quantitative easing and European Central Bank bond buying have created a one-way flow in key fixed-income markets, which in turn has made currency trends more predictable and eased volatility. Euro options, for example, are down 66% from their peak in December 2008, according to J.P. Morgan, JPM -0.40% as a tide of easy money from the world’s top central banks has calmed anxiety in the market.

The new environment is a dramatic shift from the last four years, when fallout from the U.S. subprime crisis and Europe’s sovereign-debt problems prompted investors to keep options in high demand. With volatility now broadly held in check by central-bank policies, analysts say any jump in instability caused by economic and political events may be more short-lived.

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02-Oct (Project Syndicate) — The United States Federal Reserve’s recent decision to launch a third round of “quantitative easing” has revived accusations by Brazil’s finance minister, Guido Mantega, that the US has unleashed a “currency war.” In emerging-market countries that are already struggling with the impact of rapid currency appreciation on their competitiveness, expansionary measures announced in recent weeks by the European Central Bank and the Bank of Japan have heightened the sense of alarm at the Fed’s decision.

My sense is that both sides are right. The Fed was right to adopt new expansionary monetary measures in the face of a weak US recovery. Furthermore, tying it to improvements in the labor market was a particularly important step – one that other central banks, especially the ECB, should follow.

Of course, monetary expansion should be accompanied by a less contractionary fiscal stance in industrial countries. But the advanced economies’ room for fiscal maneuver is more limited than it was in 2007-2008, and America’s political gridlock has deepened, all but ruling out further stimulus through budgetary channels. Although the effectiveness of a new round of quantitative easing will be limited, as Mantega argues, the Fed had no choice but to act.

But Mantega is also right. Given the role of the US dollar as the dominant global currency, the Fed’s expansionary monetary policy generates significant externalities for the rest of the world – effects that the Fed is certainly not taking into account.

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26-Sep (Financial Times) — Fear has crept into the foreign exchange markets: fear of central banks. Currency traders are rapidly shifting assets to countries seen as less likely to try to weaken their currencies, amid concern that the fresh round of US monetary easing could trigger another clash in the “currency wars”.

Fund managers are rethinking their portfolios in the belief that “QE3” – the Federal Reserve’s third round of quantitative easing – will weaken the dollar and trigger sharp gains in emerging market currencies. Such moves would cause a headache for central banks worried about the domestic impact of a strengthening local currency, leading to possible intervention.

Some investors are allocating money towards countries with beaten-up currencies, such as India or Russia, or those with more benign central banks, such as Mexico, that do not have a history of frequent forex intervention.

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PG View: Then of course there’s gold; which has historically proven to be a pretty appealing alternative to debased fiat currency…