RGE - Deja vu all over again (dollar falls v. the euro when Americans are on vacation edition)
リンク: RGE - Deja vu all over again (dollar falls v. the euro when Americans are on vacation edition).
Brad Setser | Nov 24, 2006
Maybe it is just me, but Thankgiving 2006 is starting to feel a bit like the period after Christmas in 2004. Both periods saw sharp falls in the dollar in thin markets. 1.31 isn’t 1.36. But, in a (almost) no volatility world, a sudden move to 1.31 certainly generated headlines.
I certainly don’t know if the dollar will rebound when more normal market conditions return next week. Some certainly think so. But there are no shortage of reasons why the dollar could stabilize below 1.30 – a slowing US economy, smaller growth (and interest rate) differentials between the US and Europe and that large (and still rising) US current account deficit. BNP Paribas seems to be among the structural dollar bears:
“To dismiss this as a technical correction is to overlook the structural reasons why the U.S. dollar is having a very hard time these days,” said Hans Redeker, global head of currency strategy at BNP Paribas.
Some carry traders somewhere must be nervous. At the Euromoney conference in early November, pretty much everyone on the program seemed to expect that the low volatility environment that makes carry trades attractive would continue.
High carry strategies (at least strategies that involved borrowing low-yielding G-10 currencies to invest in high yielding G-10 currencies) have made money nine of the last ten years. 1998 is the only exception. That was one thing I learned at the Euromoney conference.
Most expected “high carry” strategies to continue to do very well – not just in 2006, but also in 2007. I don’t think borrowing euros to buy dollars has been a popular carry trade. There isn’t much carry relative to the risks – particularly as the euro has rallied against the dollar this year despite somewhat lower eurozone rates. But borrowing yen to buy dollars certainly has been a reasonably popular high-carry strategy. And the yen joined the euro in this week's move, even if it doesn't seem to have moved as much on Friday.
For all the parallels with 2004, though, there are no shortages of differences between the fall of 2004 and the fall of 2006.
Here are the ones that stand out to me.
- China is far more exposed to a big fall in the dollar now. China has twice as many reserves today as it had two years ago. It may not quite have twice as many dollar reserves as it had two years ago (I suspect it diversified a bit during the dollar’s rally v. the euro in 2005), it still has a lot more dollars than it had a few years ago. China’s dollar reserves are almost north of 25% of China’s GDP ($700b v. $2.6 trillion or so).
- There was an active debate inside China about China’s potential (over) exposure to the dollar even before the dollar’s recent slide. But it isn’t clear to me if that has generated a consensus on what to do. China has already tried most of the easy options. Allow a bit more flexibility. Done that. Keep Chinese interest rates below US rates. Done that. Make sure the RMB’s appreciation is less than predicted in the forward market. Done that. Loosen controls on capital outflows. Done that. Increasingly allow firms to keep their dollar export proceeds on deposit in the banking system in dollars rather than convert them into RMB. Done that. Convince the banks to hold the funds raised in their IPOs offshore. Done that .... despite all these efforts, China’s reserves are still rising by $20b or so a month, and no doubt it dollar holdings are rising fast. The RMB’s slide v. the euro won’t help China’s efforts to rebalance its economy away from exports either.
- The oil exporters are much more exposed to falls in the dollar than in 2004. They have stuffed a tremendous number of dollars away over the past few years. Even those that have shifted their portfolios toward euros (Russia) have more dollars than they did a few years ago – simply because they have a lot more money to invest in international markets. The Saudis presumably have even more dollar exposure …
- GCC has even less need for a weaker currency right now than in 2004. Back in 2004, I think most of the oil exporters were expecting oil to fall back and budgeting very, very conservatively. The GCC still has a huge cushion between budgeted spending (inlcuding spending on investment projects) and export revenues. But there also is a fair amount of additional domestic spending (including spending on ‘investment projects”) in the pipeline. Indeed rising spending -- including a surge in construction -- led GCC inflation to pick up even before the GCC currencies joined the dollar's most recent slide.
- But if China and the Gulf are more exposed to a fall in the dollar than they used to be, the same cannot really be said of the rest of Asia. In late 2004, most emerging Asian economies had been intervening almost non-stop for several years. The dollar’s 2005 rally let them get out of the market (and no doubt helped many diversify). They were active in the market sporadically in 2006 (including, I would bet, on Thursday and Friday), but they have been intervening on a sustained basis.
- As Stephen Jen notes in revising his euro/ dollar forecast for the end of 2006, Europe’s economy looks healthier now than it did in 2004. The euro’s rally v. the dollar in late 2004 came in the face of rather sluggish European growth. Somewhat ironically, the euro area economy picked up in 2005 amid a big bout of euro-pessimism in the currency markets (and all sorts of political angst). And no doubt some European finance ministers are worried that the euro’s current strength will trigger a renewed bit of sluggishness in the eurozone. Think the RMB is weak v the dollar? Look at the RMB/ Euro ...
- The US needs rather more financing than it did in 2004. The US current account deficit in q3 2006 is likely to be around $900b annualized … and unless the US starts cutting rates, I suspect the current account deficit will continue to rise in 2007 even if the trade deficit stabilizes or falls, thanks to a rapidly rising interest bill.
- One thing though probably hasn’t changed much. The US net international investment position -- the gap between the dollar value of US external liabilities (FDI in the US as well as US borrowing from the world) and US investment abroad (inlcuding US lending to the world). Stock markets outside the US generally have done well again this year. And the euro’s slide increase the dollar value of US investment in Europe. The rising value of US external assets should help to offset all the debt the US is taking on. Nothing beats borrowing against the rising value of your external assets.
One of the features of the international financial system over the past few years is that any fall in the dollar has been met by both an increase in the overall pace of reserve growth (countries that peg to the dollar have followed the dollar down, and many countries have intervened rather than allow their currencies to move up) and an increase in the share of that reserve growth that is held in dollars. So a weaker dollar generally has meant more rapid growth in central bank dollar reserves: central banks have financed the US when the markets don’t want to.
At the end of 2004, I suspect some central banks had rather more dollars than they wanted. Many were able to shift in euros over the course of 2005 – that was one side effect of the Homeland investment act and the (failed) referendum on the new European constitution.
Other central banks though continued to pile up the dollars. China and the oil exporters most notably.
If the dollar’s current slide continues, those countries face a set of increasingly difficult choices.
China’s current (not-a-real basket) peg implies that it would need to pick up its dollar reserve accumulation to keep the RMB from rising against the dollar, even as its central bank talks of diversification.
The GCC countries would be faced with a similar set of choices – their currencies are depreciating in real terms as well. That will only add to (strong) inflationary pressures in the most rapidly growing GCC countries – and force the GCC countries to choose between more sterilization (which likely means scaling back spending plans), higher inflation (and real appreciation from faster price rises than in the US) or a revaluation (and a real appreciation from a nominal appreciation).
And emerging Asian economies (from India to Korea) could have to choose between allowing their currencies to appreciate (or, for some, appreciate more) against the dollar and renewed large-scale intervention.
No doubt, there are lots of folks hoping the dollar rebounds on Monday. So long as the dollar stays in its recent ranges, many key actors can continue to postpone some increasingly difficult choices. But if the dollar slides, some have to choose whether or not to join the dollar on its way down .. and others have to choose whether or not to join the euro and the pound on the way up.
Comments
Our foreign lenders are at the end of their rope. US consumers have already taken on more debt than they can handle. The dollar has become the hot potato.
Written by touche on 2006-11-24 22:35:04
Or is it that all the senior traders were on vacation on Friday?
Written by Guest on 2006-11-25 00:26:12
The FED is for a "strong dollar" policy only for superficial public consumption. In fact they would be delighted to see the dollar drop, especially vs. the yuan. Now if they could only get the Chinese from pegging to the dollar. LOL.
Written by Guest on 2006-11-25 08:31:13
Brad- It may be wise to make the connection with the G20 of last week end?
Written by Anonymous on 2006-11-25 09:40:00
I also like the thinner trading example, so if I may -
9. The US dollar is prone to larger movements during holiday seasons like Thanksgiving 2006 and Christmas 2004. Stop-loss levels are more readily breached due to a lesser number of folks reining in dollar weakness.
What the heck, let me throw in a bit of fundamental-speak to spare you all from my "random walk" shtick. I posted this as well on the Roubini site, but it's worth noting that they've apparently been cranking out dollars at a furious pace since they discontinued M3. So, there may be truth in the "helicopter pilot" designation for the current Fed Chairman after all -
10. Ever since the discontinuance of M3, the dollar printing presses have been running overtime. To no one's surprise, dropping loads of greenbacks from the skies tends to lessen the value of the dollar.
9. The US dollar is prone to larger movements during holiday seasons like Thanksgiving 2006 and Christmas 2004. Stop-loss levels are more readily breached due to a lesser number of folks reining in dollar weakness.
What the heck, let me throw in a bit of fundamental-speak to spare you all from my "random walk" shtick. I posted this as well on the Roubini site, but it's worth noting that they've apparently been cranking out dollars at a furious pace since they discontinued M3. So, there may be truth in the "helicopter pilot" designation for the current Fed Chairman after all -
10. Ever since the discontinuance of M3, the dollar printing presses have been running overtime. To no one's surprise, dropping loads of greenbacks from the skies tends to lessen the value of the dollar.
Written by Emmanuel on 2006-11-25 09:47:09
Not sure what the G-20 connection is ... US sent Kimmit (Deputy Secretary), who isn't Paulson. G-20 is not (yet) a mechanism for action -- tis very much a talking shop. Paulson's return trip to China strikes me as more important.
the FEd doesn't have a strong dollar policy. The fed has US price stability/ US economic stability policy. The Fed has made it clear over and over again that it will not direct monetary policy toward maintaining the dollar's external value. No one should expect that it does. The Treasury does have a strong dollar policy -- but agree that it is mostly in name. It would be hard for the US to advocate a weak dollar. And the US hasn't been doing anything one way or another to influence the dollar's value ... and it also clearly has a "stronger" RMB policy and would like China to intervene less, even if that means that the dollar would fall v. the rMB.
But no one should ever expect the uS to direct its macro policies toward maintaining the dollar's value. the uS has never made such a commitment. and one of the key features of BW2 is that it hasn't imposed any constraints on the US -- other folks have unconditionally bought dollars for their reserves.
M3 isn't something the fed directly controls. the various things it does control do seem to be tightening. If I was looking for the source of all the "liquidity" in the system, I would look to all the dollars central banks (notably in oil exporters) are putting on deposit these days.
the FEd doesn't have a strong dollar policy. The fed has US price stability/ US economic stability policy. The Fed has made it clear over and over again that it will not direct monetary policy toward maintaining the dollar's external value. No one should expect that it does. The Treasury does have a strong dollar policy -- but agree that it is mostly in name. It would be hard for the US to advocate a weak dollar. And the US hasn't been doing anything one way or another to influence the dollar's value ... and it also clearly has a "stronger" RMB policy and would like China to intervene less, even if that means that the dollar would fall v. the rMB.
But no one should ever expect the uS to direct its macro policies toward maintaining the dollar's value. the uS has never made such a commitment. and one of the key features of BW2 is that it hasn't imposed any constraints on the US -- other folks have unconditionally bought dollars for their reserves.
M3 isn't something the fed directly controls. the various things it does control do seem to be tightening. If I was looking for the source of all the "liquidity" in the system, I would look to all the dollars central banks (notably in oil exporters) are putting on deposit these days.
Written by bsetser on 2006-11-25 11:50:57
Good point about the oil exporters and the money multiplier effect.
Still, do take a look at the increase in repurchase agreements conducted by the Fed during the past year in the second chart from the link above. Treasury has been in on the action as well. Idiaminomics is alive and well--when in doubt, just print more money. I have a feeling that this foolishness will all end very badly.
Still, do take a look at the increase in repurchase agreements conducted by the Fed during the past year in the second chart from the link above. Treasury has been in on the action as well. Idiaminomics is alive and well--when in doubt, just print more money. I have a feeling that this foolishness will all end very badly.
Written by Emmanuel on 2006-11-25 13:01:48
"the FEd doesn't have a strong dollar policy. The fed has US price stability/ US economic stability policy."
That is very true, but what is the effect of a sudden collapse of the external value of dollar? And does the Fed have any policy tool to counteract that? Even if imported manufactured goods are not that big a component of price indices, a large drop of the dollar would surely quickly lead to large spike in oil/commodity prices in dollar terms?
It is interesting that the Chinese officials argue that USD is overvalued while US say RMB is undervalued. While they seem to agree the difference is subtle. China does not want to be the only one appreciating -- it wants currencies of competing economies to appreciate in tandem.
"M3 isn't something the fed directly controls. the various things it does control do seem to be tightening."
True until very recently. M0/M1 are creeping up again. But then the Fed does not control those either. It just controls the overnight rate :-)
That is very true, but what is the effect of a sudden collapse of the external value of dollar? And does the Fed have any policy tool to counteract that? Even if imported manufactured goods are not that big a component of price indices, a large drop of the dollar would surely quickly lead to large spike in oil/commodity prices in dollar terms?
It is interesting that the Chinese officials argue that USD is overvalued while US say RMB is undervalued. While they seem to agree the difference is subtle. China does not want to be the only one appreciating -- it wants currencies of competing economies to appreciate in tandem.
"M3 isn't something the fed directly controls. the various things it does control do seem to be tightening."
True until very recently. M0/M1 are creeping up again. But then the Fed does not control those either. It just controls the overnight rate :-)
Written by HZ on 2006-11-25 13:36:10
Certainly the dollar is doomed to fall down against most currencies. Nevertheless ECB monetary policy is not as tight as one could desire as monetary agregates have been increasing above GDP grothw rate durring the last 5 years. So large amounts of liquidity that created all kind of bubbles are the irresponsasibilty of all central banks. To me I´d rather to have gold in the next years that fiat money.
Written by Guest on 2006-11-25 15:05:32
Krugman (via Econbrowser) http://www.econ.princeton.edu/seminars/WEEKLY%20SEMINAR%20SCHEDULE/SPRING_05-06/April_24/Krugman.pdf is very illuminating. He argues that dollar plunge's macroeconomic effect may not be severe.
Written by HZ on 2006-11-25 15:59:51
Guys stop ventilating...
If the $ declines to 1.40 vs euro and Y110 or Y105 that would hardly be worth even reporting.
Are those 10 cents so big?
If the $ declines to 1.40 vs euro and Y110 or Y105 that would hardly be worth even reporting.
Are those 10 cents so big?
Written by Anonymous on 2006-11-25 16:50:15
re: "China... wants currencies of competing economies to appreciate in tandem."
"...Over the last few weeks, the Bank of Korea has been busy intervening in the FX market, buying US$ and selling Won in an effort to stem the rise of the currency. In addition, both the Bank of Korea and the Finance Ministry have intervened verbally over the last few days, labelling the Won as excessively overvalued... And yet, despite government intervention, the Won continues to power ahead... Whenever something doesn’t add up in the markets, like good conspiracy theorists, we tend to look at central banks. Could the strength of the Won be a result of the much publicized diversification of reserves? After all, the PBoC and the BoJ have all the incentives in world to push up the Won and put the Korean competition out of business. Failing that, we are really struggling to think of who is buying the Won in a world full of willing sellers..." Louis-Vincent Gave, GaveKal, Nov. 24/06
"...Over the last few weeks, the Bank of Korea has been busy intervening in the FX market, buying US$ and selling Won in an effort to stem the rise of the currency. In addition, both the Bank of Korea and the Finance Ministry have intervened verbally over the last few days, labelling the Won as excessively overvalued... And yet, despite government intervention, the Won continues to power ahead... Whenever something doesn’t add up in the markets, like good conspiracy theorists, we tend to look at central banks. Could the strength of the Won be a result of the much publicized diversification of reserves? After all, the PBoC and the BoJ have all the incentives in world to push up the Won and put the Korean competition out of business. Failing that, we are really struggling to think of who is buying the Won in a world full of willing sellers..." Louis-Vincent Gave, GaveKal, Nov. 24/06
Written by Guest on 2006-11-25 17:16:25
1.40 v euro = big. Over 50% move (I think) since early 02, record low, out of historic norms, etc.
Y 105 not so big (yen was around 100 ...).
Big appreciation of europe v. Asia = huge story. One that is remaking the world -- China is now as big a supplier to Europe as to the US. That is new.
A 10% depreciation of the RMB/ GCC (the big surplus regions in the world economy) adds to the strains on their $ pegs, so it is a story there as well.
Re: the Won ... the Koreans generally have allowed it to move up, unlike many others ... so I can see why there might be non-central bank demand.
More generally, Non-China Asian intervention is actually highly correlated with the euro/$ (a measure of pressure on the $) so I am hardly surprised.
I would not be surprised if the won is also emerging as an alternative reserve currency. China has said it holds won. I would be surprised if the BOJ was diversifying into won, but, well, I guess you never know. Of course, more than one can play this game. I woudl not be surprised if the Bank of Korea has used the period when it was out of the $/ KRW market to shift some of its reserves out of the $, and it thus has less $ exposure than the PBoC. Pick your poison.
In any case, I though Gavekal was all about platform companies that outsourced production to China ... if the PBoC is pushing up the won, why wouldn't Samsung join GE and Apple and a bunch of others in subcontracting manufacturing out? From the Gavekal point of view, where is the problem? Korea can join the US as an HQ for platform companies, run a current account deficit and rely on ongoing Chinese financing to cover its (cheap) imports ...
Y 105 not so big (yen was around 100 ...).
Big appreciation of europe v. Asia = huge story. One that is remaking the world -- China is now as big a supplier to Europe as to the US. That is new.
A 10% depreciation of the RMB/ GCC (the big surplus regions in the world economy) adds to the strains on their $ pegs, so it is a story there as well.
Re: the Won ... the Koreans generally have allowed it to move up, unlike many others ... so I can see why there might be non-central bank demand.
More generally, Non-China Asian intervention is actually highly correlated with the euro/$ (a measure of pressure on the $) so I am hardly surprised.
I would not be surprised if the won is also emerging as an alternative reserve currency. China has said it holds won. I would be surprised if the BOJ was diversifying into won, but, well, I guess you never know. Of course, more than one can play this game. I woudl not be surprised if the Bank of Korea has used the period when it was out of the $/ KRW market to shift some of its reserves out of the $, and it thus has less $ exposure than the PBoC. Pick your poison.
In any case, I though Gavekal was all about platform companies that outsourced production to China ... if the PBoC is pushing up the won, why wouldn't Samsung join GE and Apple and a bunch of others in subcontracting manufacturing out? From the Gavekal point of view, where is the problem? Korea can join the US as an HQ for platform companies, run a current account deficit and rely on ongoing Chinese financing to cover its (cheap) imports ...
Written by bsetser on 2006-11-25 18:22:24
Anon -
"If the $ declines to 1.40 vs euro and Y110 or Y105 that would hardly be worth even reporting.
Are those 10 cents so big?"
Yes - 1.30 has been a level that the ECB has tried to maintain, and 115 is about where the BOJ thinks about stepping in. At least, that's been the recent history.
"If the $ declines to 1.40 vs euro and Y110 or Y105 that would hardly be worth even reporting.
Are those 10 cents so big?"
Yes - 1.30 has been a level that the ECB has tried to maintain, and 115 is about where the BOJ thinks about stepping in. At least, that's been the recent history.
Written by madphycom on 2006-11-25 18:52:04
Dollar assets hard to diversify - China FX official
Sat Nov 25, 2006 2:07 PM GMT
BEIJING (Reuters) - Countries holding large stockpiles of foreign exchange reserves face problems diversifying their holdings away from dollar-denominated assets because of the potential market reaction to any such move, a senior Chinese forex official said on Saturday.
http://za.today.reuters.com/news/newsArticle.aspx?type=businessNews&storyID=2006-11-25T120745Z_01_WAN543651_RTRIDST_0_OZABS-FINANCIAL-CHINA-RESERVES-20061125.XML
Sat Nov 25, 2006 2:07 PM GMT
BEIJING (Reuters) - Countries holding large stockpiles of foreign exchange reserves face problems diversifying their holdings away from dollar-denominated assets because of the potential market reaction to any such move, a senior Chinese forex official said on Saturday.
http://za.today.reuters.com/news/newsArticle.aspx?type=businessNews&storyID=2006-11-25T120745Z_01_WAN543651_RTRIDST_0_OZABS-FINANCIAL-CHINA-RESERVES-20061125.XML
Written by tmcgee on 2006-11-26 04:09:42
Thought Jen summed it up nicely with this:
"Since the US offers not only the most liquid sovereign debt market but also the most liquid risky asset markets (corporate bonds, equities and other higher-risk assets), the dollar cannot collapse. Financing the US C/A deficit does not require foreigners ‘doing the Americans a favor’, and the notion that non-US citizens could suddenly stop investing in the US is greatly mistaken..."
"Since the US offers not only the most liquid sovereign debt market but also the most liquid risky asset markets (corporate bonds, equities and other higher-risk assets), the dollar cannot collapse. Financing the US C/A deficit does not require foreigners ‘doing the Americans a favor’, and the notion that non-US citizens could suddenly stop investing in the US is greatly mistaken..."
Written by Guest on 2006-11-26 05:17:53
There seems to be 2 camps in the FX world. With what seems to be the diversificaiton of carry currencies, including the transformation and introduction of the Swiss franc, perhaps there are sufficient checks and balances on (very) extreme moves that those who thrive on volatility can co-exist with the carry traders.
As for the commmodity currencies, noticed a remark on 4cast which, if I understood, inferred that Australia is now so foreign owned that shareholders cannot afford to allow a massive depreciation of the currency. More generally that slowdown or not, competition for commodities should keep M&A moving at a pace that will limit downside in the shortrun no matter what happens to commodity prices. Might help explain what may be a sudden change in the negative sentiment towards CAD.
As for the commmodity currencies, noticed a remark on 4cast which, if I understood, inferred that Australia is now so foreign owned that shareholders cannot afford to allow a massive depreciation of the currency. More generally that slowdown or not, competition for commodities should keep M&A moving at a pace that will limit downside in the shortrun no matter what happens to commodity prices. Might help explain what may be a sudden change in the negative sentiment towards CAD.
Written by Guest on 2006-11-26 06:58:22
Well, I disagree slightly with Jen ... treasuries may be more liquid than any sovereign european debt market (read in the BIS that no one contributes more to the stock of euro denominated sovereign issues than Italy ... ) and the US may have the most liquid sort-of-risky asset market, but most alternative assets are not denominated the currency of a country with a huge and growing trade and transfers deficit. The currency risk is especially high with the $. Especially for the emerging economies now propping the $ up. If you are assessing the risk of holding $ (with a higher yield than euros) or euros if you want to buy euros at some point in the future, well, the risks may be close to balance (or will be if the $ falls a bit more). But if you are concerned about returns in your local currency, I don't quite see why holding either $ or euros makes sense .. which is why I think emerging market central banks are doing the US a favor.
Written by bsetser on 2006-11-26 08:57:52
The US Dollar drops to:
- 19-month lows against the euro at 1.31, down 2.5% on the month and 10.6% on the year
- 3 month lows against the yen at 115.62, down 1.1% on the month and 2.0% on the year.
- 23-month lows against sterling at 1.9348, down 1.4% on the month and 12.4% on the - year.
- 5-month lows against the Swiss franc at 1.2072, down 2.6% on the month and 8% on the year.
- 19-month lows against the euro at 1.31, down 2.5% on the month and 10.6% on the year
- 3 month lows against the yen at 115.62, down 1.1% on the month and 2.0% on the year.
- 23-month lows against sterling at 1.9348, down 1.4% on the month and 12.4% on the - year.
- 5-month lows against the Swiss franc at 1.2072, down 2.6% on the month and 8% on the year.
Written by Guest on 2006-11-26 09:14:58
Hi Brad,
Despite the rhetoric, foreign Central Bank officials are likely intervene once the momentum in dollar selling triggers some key support levels. Central Banks are political organizations that respond to political pressure from their respective governments and corporations. If the Japanese currency were to trade at 80 yen to the dollar, corporate profits at Toyota and Honda would be crushed by the currency exchange. Moreover, the US government would find it increasingly difficult to finance the military defense of Japanese sea trade transport routes. The Central Bank of Japan will respond with a flood of yen liquidity to support the Japanese government's massive purchase of US Treasury bonds and mortgage backed debt securities. In the era of US Dollar hegemony, the yen and Euro are merely derivatives of the US Dollar. The purchasing power of every fiat currency will decline. The world's only legitimate money is Gold which cannot be printed in reckless abandon on electronic printing presses.
Regards,
Written by Dave Chiang on 2006-11-26 09:35:42
D. Chiang -- I agree with the first 1/2 of your point; indeed, lots of central banks presumably were in the market last week in one way or another. Korea, India and so on. the BoJ would no doubt step back in if the yen moved too far too fast; 115 tho is nothing for them to worry about. They were worried about yen weakness at 120.
Things don't move in a straight line ... and Asian central banks that have been sporadic players in the market are likely to become sustained participants should the dollar go through a truly difficult period. If the difficult period is sustained tho, they face a real choice -- finance the US for an extended period a la the PBoC, or change policies.
Things don't move in a straight line ... and Asian central banks that have been sporadic players in the market are likely to become sustained participants should the dollar go through a truly difficult period. If the difficult period is sustained tho, they face a real choice -- finance the US for an extended period a la the PBoC, or change policies.
Written by bsetser on 2006-11-26 11:54:59
@DC, @bsester
I think you (DC) are right on that. I even wonder if China takes the dollars and buys gold. Would that be possible, buying a lot of dollars, and using them to buy gold, without putting in Danger BT2 (@bsester)?
How big is the gold exchange in China, would it be possible for China to buy more than 50 tonnes of Gold YoY without a major notice in the press? Is gold output per year at 2500 tonnes?
I see the Euro at dangerous highs, It almost has to fall against Latin American, Asian and Canadian Currencies.
I think you (DC) are right on that. I even wonder if China takes the dollars and buys gold. Would that be possible, buying a lot of dollars, and using them to buy gold, without putting in Danger BT2 (@bsester)?
How big is the gold exchange in China, would it be possible for China to buy more than 50 tonnes of Gold YoY without a major notice in the press? Is gold output per year at 2500 tonnes?
I see the Euro at dangerous highs, It almost has to fall against Latin American, Asian and Canadian Currencies.
Written by Guestimate on 2006-11-26 12:10:45
I don't agree entirely with Jen - or that piece - but even if foreigners are ‘doing the Americans a favor’, presumably they have very good reasons and that good will, hugely important asset, is translated into a component of brand value of sorts, which is unique to the USD.
Written by Guest on 2006-11-26 12:21:55
Eur is not strong. You are all plain wrong.
The BoE effective exchange rate shows it.
The EUR averaged 89 durig the 1980s and 93 during the 1990s. It is curently standing at 94 and Germany the exports pwerhouse is having a laugh.
At the time of the launch the REER EUR printed 93.
You are misleading readers when you measure euro's rally from its weakest point. There were one off factors at play.
The German exporters lobby BGA forecast (!) is for 1.40 mid 2007.
The bilateral eur vs $ would have to get to 1.45/1.50 to start having a negative impact.
The reality is that the REER EUR is WEAK compared with historical precedents.
The BoE effective exchange rate shows it.
The EUR averaged 89 durig the 1980s and 93 during the 1990s. It is curently standing at 94 and Germany the exports pwerhouse is having a laugh.
At the time of the launch the REER EUR printed 93.
You are misleading readers when you measure euro's rally from its weakest point. There were one off factors at play.
The German exporters lobby BGA forecast (!) is for 1.40 mid 2007.
The bilateral eur vs $ would have to get to 1.45/1.50 to start having a negative impact.
The reality is that the REER EUR is WEAK compared with historical precedents.
Written by Anonymous on 2006-11-26 12:31:46
"Gold fell from its highest in nine days on concern the International Monetary Fund may sell some of its $64.7 billion in gold reserves after some of the fund's executive directors recommended a sale..." http://www.bloomberg.com/apps/news?pid=20601100&sid=a3lTn_cVQ35c&refer=germany
Written by Guest on 2006-11-26 12:34:40
"the International Monetary Fund may sell some of its $64.7 billion in gold reserves"
From the same rule book as HM Treasury's?
Guess who's going to snatch those?
What are 60 odd billion army in front of 4 trillion armada?
Strikes me as someone willing to smooth reserves diversification into gold.
From the same rule book as HM Treasury's?
Guess who's going to snatch those?
What are 60 odd billion army in front of 4 trillion armada?
Strikes me as someone willing to smooth reserves diversification into gold.
Written by Anonymous on 2006-11-26 12:50:57
The exchange markets are telling the world something very simple, let US made good flow. For too long nations across Europe and Asia have used technicalities to limit the flow of US made goods. For example, Buicks are hot item in China but it trade barriers limit the export of the product to China. Unacceptable!!! We have Europe blocking US electronics for decades. Unacceptable!!! We have Korea limiting US made goods. Unacceptable!!!
I would urge more attention to the trade barriers unemployed by Europe and Asia.
I would urge more attention to the trade barriers unemployed by Europe and Asia.
Written by Guest on 2006-11-26 13:52:48
Anonymous -- I link to your measure of the euro's real value would be appreciated. My sense is that the euro right now is extremely strong vis a vis asian currencies ... and I would bet most indexes understate Asia's weight in europe's trade (It depends on how quickly the index is updated). The euro indexes will also give lots of wieght to the euro/ swiss franc/ nordics, since the eurozone trades a lot with all of them. But in some sense, now that most european currencies trade together, what interests me is the value of the euro relative to the other big parts of the world economy. Right now the euro is fairly strong v. $ and extremely strong v. Asia (given Asian productivity has increased enormously since the early 90s) and quite strong v. most EMs that manage their currencies primarily against the dollar.
But I take your point that the german export machine is doing quite well right now with the euro at its current levels ... (Italy, not so much ...) and surging capital goods spending in many emerging economies bodes well for further growth. And I also do need to look more closely at the euro's real index - its composition and so on.
one last thing -- are the values you mention nominal or real? Me thinks that eurozone inflation has been consistently lower than US inflation, which makes comparing nominal indexes over time a bit dicey. The dollar needs to depreciate slowly to stay constant in real terms v. the euro as US inflation has exceeded eurozone inflation.
But I take your point that the german export machine is doing quite well right now with the euro at its current levels ... (Italy, not so much ...) and surging capital goods spending in many emerging economies bodes well for further growth. And I also do need to look more closely at the euro's real index - its composition and so on.
one last thing -- are the values you mention nominal or real? Me thinks that eurozone inflation has been consistently lower than US inflation, which makes comparing nominal indexes over time a bit dicey. The dollar needs to depreciate slowly to stay constant in real terms v. the euro as US inflation has exceeded eurozone inflation.
Written by bsetser on 2006-11-26 14:05:23
