Daily Archives: September 16, 2010

Alan Beattie

Somewhat as predicted, or at least predicted by me, Tim Geithner went as far as he could go in suggesting that various options were on the table for trying to push the Chinese into letting the exchange rate rise without giving any hostages to fortune.

The Murphy-Ryan bill (similar to Schumer-Graham in the Senate) got respectful attention and the possibility of support, though no commitment. Naming China as a currency manipulator, though, seems still to be off the tableRead more >>

Excerpted from Gillian Tett, ft.com:

Back in 1985, when the deal was first struck to strengthen the yen, many American observers initially considered it a success. For in the late 1980s, the currency moved towards the Y150 level, where it stayed for several years. Read more >>

“A strengthening in the fiscal balance by 1 percentage point of GDP is, on average, associated with a current account improvement of 0.2–0.3 percentage points of GDP.” This is the conclusion from a top notch set of researchers, posted on VoxEU.

With renewed focus on global trade imbalances, this may be of interest to policymakers currently looking at exchange rates. The finding holds across emerging and developed economies, though the “association is significantly higher when output is above potential.” Food for thought.

Ralph Atkins

Mario Draghi, Italy’s central bank governor, has struck a tough tone in an article written for the Financial Times. His target was “systemically important financial institutions” – the largest banks whose collapse would threaten the global economy. Lehman Brothers was the first such institution that was allowed to fail. It was also the last, Mr Draghi pointed out. “The public will not, and should not, accept more such bail-outs.” Regulators had also to turn their attention on the “shadow banking sector” hitherto beyond their reach.

His comments will have been noted carefully by colleagues on the governing council of the European Central Bank, which is meeting in Frankfurt on Thursday for its regular monthly non-interest rate decision meeting. Mr Draghi is a possible candidate to succeed Jean-Claude Trichet when the ECB president’s eight-year non-renewable term expires in October 2011 (another is Axel Weber, Germany’s Bundesbank president).

Mr Draghi, who chairs the global Financial Stability Board, has kept a low profile on ECB monetary policy issues. But his call for a tougher regime to deal with wayward banks underlines his “hawkish” credentials. Read more >>

Japan intervention

Other news

Ralph Atkins

The problems Axel Weber, Bundesbank president, has faced over Thilo Sarrazin, the controversial Bundesbank board member, whose recently-published book shocked the country’s establishment, continue to attract headlines in Germany. The damage to the famously-reticent Bundesbank’s reputation was seen as a threat to Mr Weber’s chances of succeeding Jean-Claude Trichet when the European Central Bank president’s non-renewable eight year mandate expires in October 2011.

The Frankfurter Allgemeine Zeitung has been investigating the role played by Christian Wulff, Germany’s federal president, in negotiating a deal by which Mr Sarrazin agreed to resign. The thrust of its coverage is that Mr Wulff, in effect, imposed a deal on the Bundesbank, which ended up withdrawing its previous criticism of Mr Sarrazin and thanking him for his work as a board member.

Does all this matter? Read more >>

Little wonder the Kiwi dollar fell this morning: a bleak statement accompanied today’s decision to hold the cash rate at 3 per cent. In short, the global and domestic outlooks have both worsened. Not to mention the earthquake.

For global markets, the important bit was that rate rises are likely to be slower than thought in June. Read more >>

The Reserve Bank of India has raised the repo rate 25bp to 6 per cent, and raised the reverse repo 50bp to 5 per cent.

Blistering growth in industrial production means the central bank was likely to focus on containing domestic inflation rather than worrying about a possible slowdown in global growth. Inflation fell in July and August but is “likely to remain at unacceptably high levels for some months”.

“Inflation remains the dominant concern in macroeconomic management,” reads the statement. “About two-thirds of the August inflation can be attributed to items other than food articles and products. Notwithstanding slight moderation in August 2010, the headline inflation remains significantly above the trend of 5.0 – 5.5 per cent in the 2000s.”

The bank also wants to end the “prevalence of negative real interest rates”, Read more >>

Alan Beattie

No doubt in a valiant attempt to feed our insatiable curiosity ahead of time, some excerpts from Tim Geithner’s written testimony and prepared oral statement have come out tonight, before Thursday’s appearance in front of two Congressional committees. The key passage:

“We are concerned, as are many of China’s trading partners, that the pace of appreciation has been too slow and the extent of appreciation too limited. We will take China’s actions into account as we prepare the next Foreign Exchange Report, and we are examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly.”

It’s not explosive stuff but it does show that: 1) the administration is considering (or at least wants to give the impression that it is considering) a range of options, which could include classifying exchange rate undervaluation as an illegal export subsidy or taking a case to the WTO; 2) It is not a given that the Treasury will repeat its previous decision to resist naming China as a manipulator in the twice-yearly currency report. Read more >>