Tag: US Dollar

  • DOLLAR-YUAN CURRENCY WAR

    DOLLAR-YUAN CURRENCY WAR

    By Fred Schmid

    [This article published in: isw report 83/84 “China crisis as a chance” is translated from the German on the Internet,

    .
    The Institute of Social-Economic Research is in Munich.]

    The Yuan is completely undervalued and therefore harms the US economy. That is the aggressive reproach of the US government.

    As long as US citizens could indulge their consumer orgy financed by China’s credit, the US economy flourished somewhat and the Yuan exchange rate was hardly a theme. A scapegoat for the misery is now sought in the crisis with the highest US unemployment in decades. The “manipulated” and “artificially under-valued” Yuan price is the reason for the Chinese export success destroying jobs in the US and making difficult US exports to China.

    First of all, no one can be certain or prove whether a currency is under- or over-valued because there is no objective criterion or standard. Even exchange rates that supposedly are freely formed on the market are politically manipulated by interventions of states, state debt acceptance and fixing key interest rates. These exchange rates are distorted by market forces and by potent financial speculator5s who speculate on a devaluing or upgrading of the currency. Currency speculation is the main business of the financial fraudsters today.

    Since the fall of 2008, the Yuan price has been bound in a firm relation to the dollar and neither upgraded nor devalued. When exchange rates deteriorate in trade for the US, this means firstly the productivity-development of the US economy has worsened compared to China. China cannot be punished for that. Whether the foreign trade situation would improve substantially for the US with an upgrading of the Yuan is doubtful. The export miracle hoped for by the US did not occur during a first upgrading phase between July 2005 and June 2006. Although the Renminbi rose 21 percent compared to the dollar, the US balance of payments deficit in trade with China hit a record high in this time period at 39 percent. (The Yuan was upgraded around 58% between January 1994 and the end of 2010.)

    With the beginning of the financial crisis, the Chinese government suspended the gradual adjustment. Its currency should not fall in the turbulences of the financial crisis which at the start hit the export industry hard and cost millions of jobs. 67,000 businesses of the export industry declared bankruptcy. Therefore the Chinese government saw no need for additional action in the matter of upgrading. The Yuan was firmly coupled to the US dollar at a rate of 6.83.

    The value of the Yuan is not the cause for the US trade and balance of payments deficits. The reasons are the high state indebtedness (armaments/wars and tax gifts to the rich) and the indebtedness of private households caused by stagnating or declining real incomes of the masses (income distribution in favor of profits and interest income). In the words of Stephen Roach, Asian president of Morgan Stanley, “If the US (state and private households) continues to save, the US will be less dependent on financing by Chinese savers. American consumers would no longer overspend and buy cheap Chinese goods. Which came first, the surplus or the deficit? Did the Chinese development strategy force Americans to blow their savings? Or did American greed, living beyond their means, force the Chinese to supply them with cheap capital and bargain-priced goods?” (HB. 4/14/2010). Over 60 percent of the articles offered by the largest US discounter Walmart come from China. The products are voluntarily acquired by Americans. If China did not offer them, other cheap producers would quickly take over this role. The US has a trade deficit with 90 countries. The US must accuse all these countries of currency manipulation as in the case of China. Investors in developing countries urged a firm dollar-bond early on. They wanted to prevent profits transferred from their countries from losing value.

    The essential reason for the imbalances in US trade is that the American economy is no longer competitive in relation to these 90 countries. In the course of militarization (imperial overstretch, “Homeland Security” mania) and financialization, the US economy increasingly became a waste economy with rising deficits in infrastructure and education. In addition, a process of de-industrialization has been carried out in the US in the last decades. US transnational corporations have largely shifted their production sites abroad, above all to China. Stephan Roach explains: “US corporations produce cheaply in China and thus their profits, stock prices and the wealth of many shareholders are blown up. This was basically an upward spiral for Americans driven by virtual purchasing power” (HB, 4/14/2010). What previously was a manifestation of the imperial power and strength of the US, namely living at the expense of the rest of the world, now suddenly changes into weakening and consumption of the economic substance.

    “GET TOUGH ON CHINA”

    The production transfers to China have led to exporting industrial goods with low or medium technological standards by US or other western corporations from China to the US. US high-tech products that China would like to import are subject to the politically-defined US embargo. 20 product categories are blocked for export to China. In 2001, 18.3% of Chinese high-tech imports came from the US. Through the restrictions of the Bush administration, this share fell to eight percent in 2008 (chd, 3/6/2010).

    In the US, the debate around the Yuan among economists is very controversial. While Nobel Prize winner Paul Krugman accuses China of keeping the Yuan price artificially low and urges “getting tough on China,” Nobel Prize winner Robert Mundell does not agree. Nobel Prize winner Joseph Stiglitz urges loosening high-tech restrictions to facilitate a more even trade balance (cf. chd, 3/22/2010). The economist Peter Schiff, well-known for his exact prediction of the 2008 crisis, writes: “It is all a PR-maneuver that our leaders could `get tough’ with the Chinese. They know very well where their bread is buttered. They depend on the Chinese buying our debts and providing our citizens with cheap products that our unproductive economy cannot produce. When China buys our debts, it uses its own savings. To purchase a trillion dollars in US Treasury bonds, the Federal Reserve must increase our money supply a corresponding amount leading to a sharp decline of the dollar” (chd, 3/20/2010). Schiff warned that a falling dollar would lead to consumer prices rising by leaps and bounds, to quickly soaring interest rates and to a collapse of US living standards. This would mean the end of Krugman’s “Get tough on China” policy, he added. Other experts point out that China has contributed enormously to the revival of the global economy and not only finances US debts and supplies US consumers with cheap consumer goods. Finally China has reduced its balance of payments surplus in the last three years by rapidly increasing imports. It decreased imports more slowly than exports in the crisis year 2009.

    The reproach of currency manipulation is not new and is always raised by Americans against states when they are at as competitive disadvantage in trade policy. In 1971 the US government accused Germany and Japan of currency manipulation and forced them to upgrade their currencies. On August 15, 1971 President Nixon put a temporary surcharge on imports. The remark of Nixon’s Treasury secretary John Connally, full of arrogance of power, was the monetary motto of the superpower: “The dollar is our currency but your problem.” In the 1980s when the US had gigantic deficits in trade with Japan, Washington forced the Asian power to drastically upgrade the Yen in the 1985 Plaza agreement. The US balance of trade did not improve as a result. Billions in speculations streamed to Japan and pumped up the trade- and real estate bubbles until they burst and gave the country its “lost decade.”

    China will not fall in the same trap as Japan at that time. Washington wants to force Peking to abrupt upgrading through sanctions and a trade war if necessary. The past concessions of the Chinese leadership are not enough for the US government. China recently suspended the dollar bond just before the G20 summit in June 2010 in Toronto. Since then, it couples its currency to a basket of currencies that better reflects trade relations. The Euro will be given more weight in setting the Yuan price. The Yuan was slightly upgraded three percent from July to the mid-November G20 summit in Seoul but that was not enough for the US government.

    On September 29, 2010 the US House of Representatives passed a bill against “currency manipulation” directed first of all against China. It can first become law after passage by the Senate and President Obama’s signature. Afterwards penal duties and other sanctions will take effect quasi-automatically. The American Chamber of Commerce in China representing 1200 firms appealed to the Senate to kill the bill. As reasons, it said significant US job growth would probably not be generated by the law and American exporters would be hurt. “Censuring China will not help the US economy. This legislation could cost American jobs,” the president of the Chamber of Commerce, John D. Watkins, declared (quoted according to chd 10/1/2010).

    CURRENCIES AS WEAPONS

    Now and then the monetary skirmish between the US and China threatens to change suddenly into a world currency war. The US has a trade deficit problem with many countries, with the export powers Germany6, Japan and not only with China. They urge these countries to do more in expanding their domestic markets and thus equalize their trade balances and reduce the imbalances in world trade. At the same time the US manipulated its currency downwards when the US Federal Reserve after the G20 summit announced and implemented buying $600 billion in US Treasury bonds in the next six months. This measure is tantamount to starting up the money printing machine.

    A cheapening or devaluation of the dollar will make difficult exports to the US and will favor US exports. For want of mass purchasing power on the domestic market, all capitalist metropolis countries want to export out of the crisis and compensate their weak domestic demand through greater exports on the world markets. Only Germany was successful with this strategy. Since there will be no global import vacuum any more4 like the United Consumer States of America, the trade conflicts intensify and the danger of a devaluation-race threatens like the worldwide economic crisis 80 years ago.

    Presently the US is mired in a credit crunch like Greece and Ireland – only in other dimensions and with other options. Annually it must fork out $500 billion for its gigantic debt mountain. The US state debt-maker now has an additional problem. Its most reliable and largest creditor turns off its money-pump. For a year Peking has not purchased any US bonds. Within a year, the Chinese reduced their portfolio in treasuries from $938 billion (at the end of September 2009) to $884 billion (at the end of September 2010), that is $54 billion (GT 11/17/2010; chd 5/19/2010). Previously from 2008 to the fall of 2009, they purchased $17 billion of state bonds every month. We can o9nly puzzle over the motives of the Chinese. Firstly they buy Euros and other currencies for reasons of risk-scattering to partly offset the dollar decline. That is also the reason for the fluctuations in holdings of Treasuries on the backdrop of a downward trend. Secondly, it seems to be a certain answer to the China-bashing driven by the US government for a year in the question of Yuan upgrading. In the meantime, China has become confident enough to strike back with the weapon of the economy. The USA again tries to make a virtue out of its money-distress and recoin it to its advantage.

    With the additional dollar flood, the upgrading pressure on the currencies of threshold countries increases which could again limit their export-capability to the US. More “hot money” sloshes around on their stock- and real estate markets. The danger of bubbles in these countries increases. Like the Japanese Yen, the dollar becomes the profitable source for carry-traders, golden times for US and international financial capital. If the bubbles on the stock exchanges and real estate markets of threshold countries burst, these countries pay for the US debt policy.

    The dollar flood brings the advantage for the US that its foreign debts are devalued as the dollar is devalued. Greece and Ireland would be afraid to balance their deficits with Euros they print themselves. Everything is allowed the powerful.

  • Is the U.S. dollar on the brink?

    Is the U.S. dollar on the brink?

    julianBy: Julian D. W. Phillips, Gold/Silver Forecaster – Global Watch

    Just take a look at the chart of the U.S. dollar Index and you see a frightening sight.   If it sinks any further its support will have evaporated.   We have watched all this week the gold price rise and look good in the dollar.   But in the euro it has barely moved.   Against the Swiss Franc the dollar looks so weak.   With the Technical picture looking so poor, one turns to the fundamentals to see if they conflict or support a downturn for the dollar.

    The U.S. dollar Fundamentals

    Can government govern finances?

    The United States, right now, is on the brink of having used up all its legislated credit capacity.   At $14.3 trillion there is a desperate need for a higher credit limit.   Unless, by Friday, they have passed legislation to raise this, the government cannot issue checks or pay staff.   Yes, they can use various tricks to delay this to accommodate political brinkmanship, but the outside world will be alarmed that the government is unable to tend to such basics or allows politics to overrule finances.   Here there is a clash of systems, the need for financial correctness against the games politicians play.   With President Obama’s administration without sufficient power to legislate as they want at a critical time when government should be strong, there is little to inspire confidence in the U.S. government.   Global confidence in the U.S. dollar will be shaken if such a financial mess were to happen.   We would most likely see the ratings agencies downgrade U.S. debt before that happens.   From outside it looks as though the U.S. is oblivious to foreign investor’s opinions at a time when the U.S. is reliant on foreign investors buying U.S. debt.

    Moving down the ladder we have seen so much in the press that individual States are on the brink of bankruptcy and some already there and little seems to be being done to rectify matters to date.   Or should foreigners just presume that the Fed will rescue them with bailouts?   If that is to be the path followed that again will undermine foreign investors confidence in the dollar.

    What needs to be understood is that government finances at all levels have to be sound to inspire confidence?   It seems to be a simple obvious statement, so why is it not being applied?   Even Fed Chairman Mr. Ben Bernanke is calling for government to sort out the Federal deficit but all we see is a partisan battle that seems oblivious to their countries crying needs.   Or do we misunderstand the scene.   Are politics more important than good order?   Today saw the revelation that China owns more than $360 billion of Treasuries than was thought to be the case.   Does the government not worry about this dependence?   Or does the government want to ensure that the dollar weakens?   This is a strong impression pervading so many foreign exchanges now.

    And the inflation coming from the food and energy worlds is globally pervasive and capable of threatening what little economic growth there is in the developed world.  It will affect many, many countries and could reach into the U.S.A.   We do expect the U.K to experience a shrinking of its GDP in the first quarter of 2011 announcing the arrival of a double-dip recession, so shrinking growth could also affect the U.S. still with its lackluster economy.   What will this somewhat emasculated government do then?

    The Trade Deficit

    For so many years now the U.S. has run a Trade deficit balanced by a surplus on the Capital account.   This inflow of capital is the flow of power from the U.S. to foreign creditors.   Already we are seeing a tendency to try to diversify away from the U.S. dollar.   If this trend gathers momentum then the overall picture on the Balance of Payments could sink to a deficit.   How close is it now?   Or is it happening as foreign investors diversify into other currencies to stave off or reduce the impact on their surpluses of a falling dollar and overweight natures of their dollar holdings.   It’s bound to happen if only because of prudence.   And yet the U.S. is doing nothing to address the situation, why not?   We see that the main beneficiary of a weak dollar would be the U.S. on the trade front as well as on the debt front.  So one question that needs an answer is, does the U.S. government want a weak dollar?   Or is the U.S. government unconcerned at the U.S. dollar’s exchange rate.

    Inevitable weakness

    It seems that Europe and other nations are more worried about the U.S. dollar exchange rate than the U.S. is.   This laissez-faire attitude appears to confirm that the U.S. has no intention of protecting the U.S. dollar’s exchange rate.   For that reason we have to conclude that the U.S. dollar is inevitably headed to more weakness.   In the past the ‘top dog’ nature of the U.S. currency meant that the rest of the world had to suck it up.   Now, it’s only a matter of time before the U.S. is second to China’s economy in the world.   By 202 the Chinese economy will have doubled and we have no doubt that the Yuan will be the world’s ‘top dog’ currency, eclipsing the dollar.   When that happens and it may be well before 2020, the dollar like all other global currencies will have to pay its own bills with goods not simply freshly printed dollars.

    The $ and the € Gold Price

    Is it any wonder then that the gold price is rising in the U.S. dollar.   The euro is, the Swiss Franc, the Pound and other currencies are rising in the dollar too.   It’s not the gold price rising in the dollar it’s the dollar falling in terms of gold.  Likewise other currencies are not rising against the dollar, the dollar is falling against them.

    To get a clearer picture of what is really happening in the gold price one has to look at the gold price in the euro or the Swiss Franc.   That will reflect demand and supply better.   We have and will see the gold price rise in the euro for fundamental reasons but for accuracy’s sake we have to relegate the dollar price of gold to second or third place, because that’s more about the dollar than about gold.

    Gold as part of the global monetary system

    Today we read that the shareholders of the Bank of Italy, the Italian banks want to use the gold held by the central bank to shore up their balance sheets.   The Bank of Italy has gold reserves of 2451.8 metric tonnes (68.6% of their foreign exchange reserves) at the moment.   As shareholders assets, by including these reserves at market value, Italian banks look a lot healthier.   Yes, this is a touch of ‘cooking’ the books, but it recognizes the fact that gold has a monetary value, recognized in the monetary world.   In inter-nation currency transactions gold is being used to secure loans.   It has a de facto role in the monetary system that is getting harder and harder to avoid.

    Could gold be confiscated?

    Of course gold will never be confiscated for the same reasons it was in 1933 [money supply expansion].   Its role today can be as collateral for international transactions, as we see it being used now.   In a global world it is the only real monetary asset that bypasses nations to be global money that is truly mobile.   Should a nation find itself in trouble, much like these Italian banks, then gold sits there waiting to shore up balance sheets and serve as collateral for international currency swaps for nations with questionable creditworthiness.   Will the dollar fall into that category once the Yuan is a truly international currency?   Certainly holding gold will bypass that eventuality.   Even in the hands of the U.S. government its citizen’s gold could give the dollar a golden hue.

    In China it is understood by all that all assets of the nation including citizen’s gold is the property of the state.   In the U.S. citizens are allowed the privilege of owning gold and don’t have the right.   How small a step to confiscating the huge tonnage of citizen’s gold wherever it is.

    news.goldseek.com, 1 March 2011

  • Euro vs. dollar

    Euro vs. dollar

    EurovsDollar

    © Photo: SXC.hu

    France is preparing a full-scale reform of the world financial system. Paris, which is chairing the G20 at present, is suggesting lowering the clout of the dollar, abandoning currency and trade wars, and focusing on economic cooperation.

    This is not the first initiative of the French authorities for radical reform of the financial system. Paris is practically the main critic of the European Central Bank’s policies and opponent of a strong Euro which is hitting national exports. This time, French Minister of Finance Christine Lagarde has put forward the idea of reforming the world financial system so as to rule out the possibility of the authorities of different countries manipulating currency rates. Dmitry Smyslov, an expert from the Institute of World Economics and International Relations at the Russian Academy of Sciences, agrees that the need for this reform is ripe.

    “The first problem is establishing an orderly, well-balanced international currency system, which is different from the one we have now, a system that is dollar-centric but not pinned to any realities or international agreements. The reason is that the Bretton Woods is no longer applied and now there are no clear-cut international boundaries within which the currency system functions.”

    The French Minister of Finance did not even try to conceal that she was first and foremost unhappy about the respective moves of the USA and China. Those two countries are rather openly pursuing weak national currency policies that are beneficial for local manufacturers but detrimental for European ones. Experts warn that for this very reason these two giants of the world economy will be against the radical reconstruction of the world financial system. Analysts recommend that Europe should start with itself, that is establish a uniform taxation system, strengthen the economic integration of the EU and, most importantly, sort out its debts. The burden of this indebtedness is what is worrying investors and discrediting the Old World currency, Dmitry Smyslov says.

    “Another issue for the EU authorities is improving how the European Currency Union functions. To achieve this aim, countries should agree upon their national budgets and centralize their coordination. Simultaneously, a permanent mechanism for helping countries in trouble should be set up.”

    It is not all that simple. Even the establishment of a 750 billion euro Rescue Fund in 2010 could not do without a scandal. Some countries openly declared that they did not want to bail out their imprudent neighbours. While the Europeans were arguing, China built up its gold reserves, adding 19% in 2010, and even began to buy up the bonds issued by European countries. This strengthened the yuan even more. The USA breathed down China’s neck, raising the value of the dollar, pumping cash into the market and selling more and more bonds to foreign investors. France is hardly likely to be able to change this situation without serious support from other members of the G20.

    , Feb 8, 2011

  • Bank of India becomes first to offer trade settlement in yuan

    Bank of India becomes first to offer trade settlement in yuan

    Saibal Dasgupta

    yuan+dollarBEIJING: Bank of India has become the first Indian bank to offer trade settlement facility between the rupee and the Chinese RMB from Hong Kong. This follows intense persuasion by the China Banking Regulatory Commission, which is trying to gain acceptance of the RMB as an international currency.

    “We are the first Indian bank to offer real-time settlement facility in RMB to Indian exporters and importers. It will be save a lot of time because settlement in US dollars usually takes three working days,” Arun Kumar Arora, BoI’s chief executive in Hong Kong, said during a recent visit to meeting regulators in Beijing.

    Indian buyers are at present making payments in US dollars, and they often have to convert rupee into the US currency for the purpose. The US dollars will no more be the intermediary currency as the BOI is offering direct settlement between the rupee and the Chinese money.

    Chinese exporters want their money in the local currency, which is regarded as more stable compared to the US dollar. They are also in a position to have their way because Indian buyers do not have an alternative source of low-cost goods, sources said.

    The process has been facilitated by a recent memorandum of understanding signed between the Reserve Bank of India and the CBRC to enhance banking relationship between the two giant neighbors.

    BoI has opened a RMB with the Bank of China, which will provide real time settlement with buyers and sellers across all provinces of China. The move is part of a campaign by the Hong Kong Monetary Authority, which has persuaded 100 foreign banks to enter into arrangements with Chinese banks for trade settlement in RMB.

    We will sell RMB against the US dollar, and companies can buy as much as they want provided they have the right papers. For individuals, the limit of 20,000 RMB a day,” Arora said. He expects settlements for an amount ranging between 200 million and 300 million in the first year.

    Hong Kong is the only offshore market for the Chinese currency. The past year saw $400 billion of Chinese yuan being traded in Hong Kong against other currencies.

    BoI is also awaiting permission from Chinese regulators to establish a branch in Beijing, where it has been running a representative office for the past four years. It has recently signed an MoU with the CBRC on converting the representative office into a branch. The bank has been running a branch in the boom city of Shenzhen for the past four years. The Shenzhen branch will also be involved in providing additional support for the trade settlement business.

    timesofindia.indiatimes.com, Feb 24, 2011,

  • Dollar to Become World’s `Weakest Currency,’ Drop to 75 Yen JPMorgan Says

    Dollar to Become World’s `Weakest Currency,’ Drop to 75 Yen JPMorgan Says

    By Shigeki Nozawa

    dollar falling
    The U.S. dollar has declined against 12 of its 16 most-traded counterparts this year, according to data compiled by Bloomberg. Photographer: Alastair Miller/Bloomberg

    The dollar may fall below 75 yen next year as it becomes the world’s “weakest currency” due to the Federal Reserve’s monetary-easing program, according to JPMorgan & Chase Co.

    The U.S. central bank, along with those in Japan and Europe, will keep interest rates at record lows in 2011 as they seek to boost economic growth, said Tohru Sasaki, head of Japanese rates and foreign-exchange research at the second-largest U.S. bank by assets. U.S. policy makers may take additional easing steps following the $600 billion bond-purchase program announced this month depending on inflation and the labor market, he said.

    “The U.S. has the world’s largest current-account deficit but keeps interest rates at virtually zero,” Sasaki said at a forum in Tokyo yesterday. “The dollar can’t avoid the status as the weakest currency.”

    The Fed said on Nov. 3 it will buy $75 billion of Treasuries a month through June to cap borrowing costs. The central bank has kept its benchmark rate in a range of zero to 0.25 percent since December 2008. The Bank of Japan on Oct. 5 cut its key rate to a range of zero to 0.1 percent and set up a 5 trillion yen ($59.9 billion) asset-purchase fund.

    The dollar traded at 83.38 yen as of 12:04 p.m. in Tokyo after falling to a 15-year low of 80.22 on Nov. 1. The greenback declined to post-World War II low of 79.75 yen in April 1995. The U.S. currency has declined against 12 of its 16 most-traded counterparts this year, according to data compiled by Bloomberg.

    Tightening Unnecessary

    There’s no need for any monetary tightening in the U.S. as even prolonged easing won’t heighten inflationary pressures with the balance sheets of banks and households still hurting from the fallout of the global financial crisis, Sasaki said.

    Ten-year Treasury yields may decline to around 2.25 percent over the next year, and their premium over similar-maturity Japanese yields won’t widen, he said. The benchmark 10-year Treasury yielded 2.89 percent today.

    The world economy is likely to expand 3 percent next year amid the extra liquidity provided by central banks, “repeating a pattern from early 2002 to the end of 2004” when improving risk appetite boosted stocks and commodities and the dollar fell 25 percent against the yen, Sasaki said.

    With monetary easing in the U.S., Japan and Europe likely to bolster the global recovery and increase demand for yield, the yen is poised to weaken against other currencies beside the dollar to levels last seen in early 2007, Sasaki said.

    Japan will refrain from selling the yen even if it strengthens against the dollar, following international criticism of foreign-exchange intervention, he said. The nation intervened in the currency markets for the first time in six years on Sept. 15 when the yen climbed to a 15-year high.

    To contact the reporter on this story: Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net.

    To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

    https://www.bloomberg.com/tosv2.html?vid=&uuid=90a3d4d1-d357-11ed-9133-55546f6d5541&url=L25ld3MvYXJ0aWNsZXMvMjAxMC0xMS0xOC9kb2xsYXItdG8tYmVjb21lLXdvcmxkLXMtd2Vha2VzdC1jdXJyZW5jeS1kcm9wLXRvLTc1LXllbi1qcG1vcmdhbi1zYXlz, Nov 18, 2010