Daily Archives: November 19, 2010

Officials from Taiwan’s central bank have rejected the implication of currency undervaluation in a chart used by Ben Bernanke. The offending graph – to the right – shows changes in the real effective exchange rate on its vertical (y) axis. Taiwan’s currency weakened by 2.8 per cent in real terms between September 2009 and 2010, according to this Fed chart. Taiwan says it fell by just 0.2 per cent, and argues that REER is not a good measure of undervaluation anyway.

At stake is responsibility for volatile capital flows that add to inflation in emerging markets and threaten to destabilise recovery. Emerging markets point to the Fed’s stimulus programme. But Mr Bernanke argued in his speech that the Fed’s $600bn stimulus programme was good for the world economy, refusing to accept responsibility for the extra inflationary pressure flowing through to emerging markets. In spite of former chair Alan Greenspan’s comments to the contrary, the Fed also continues to deny any attempt deliberately to weaken the dollar.

Indeed, Mr Bernanke accused emerging market economies of spending their reserves to slow the appreciation of their currencies. Hot money, he argued, was flowing into emerging markets regardless of Fed actions, because investors expected currencies they were buying to strengthen further. Since – by this chart – Taiwan’s currency has strengthened the least (indeed, has weakened), the implication is that Taiwan is one of the worst ‘offenders’. Read more

Ralph Atkins

Ben Bernanke, the US Federal Reserve chairman, was forthright when he spoke at a European Central Bank conference in Frankfurt this morning. As reported on ft.com, he defended the Fed’s latest quantitative easing measures, and sought to turn the fire instead on China.

As I predicted in a previous post, Jean-Claude Trichet, ECB president, avoided any great clash with his US counterpart, whom he described as “a great member of the brotherhood of central bankers”. Others at the ECB may worry about further dollar weakness. But the ECB president repeated how US authorities also saw a strong dollar as important. On Mr Bernanke’s broader points about tackling global imbalances, Mr Trichet was also supportive.

But Mr Trichet seemed unnecessarily defensive of the eurozone at times. He interjected at one point that Europe’s monetary union was broadly in balance, even if some countries (Germany) had large surpluses. As far as I could tell, Mr Bernanke was not referring to Germany in this context at all. Read more

China and other developing countries should act to reduce their current account surpluses, US Federal Reserve chairman Ben Bernanke said in a firm rebuff to complaints that the Fed is manipulating the dollar.

“The current international monetary system is not working as well as it should,” Mr Bernanke said in a speech delivered at a European Central Bank conference on Friday morning. “Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals.” Read more

Monetary tightening in China just sped up. The Chinese central bank has just announced another 50bp increase in the deposit reserve ratio – which will happen at the end of November. The previous hike on November 10 was also 50bp and was expected to remove about $45bn liquidity from the Chinese economy.

Presumably – though this is not detailed in the release – the new reserve ratios will be: 18.5 per cent for six largest banks; 18 per cent for other large banks; and 16 per cent for small- and medium- sized banks. China is also raising rates – a 25bp hike took place a month ago and there have been further rumours since then and today in the markets (though perhaps the reserve increase will substitute). Read more

Life just got a little easier for small depository banks in the US: the Fed cut the seasonal discount rate last night from 0.25 to 0.20 per cent. “Seasonal credit is available to help relatively small depository institutions meet regular seasonal needs for funds that arise from a clear pattern of intrayearly movements in their deposits and loans and that cannot be met through special industry lenders,” explains the Fed. The small move will have limited market impact, but the trend is significant. Seasonal discount rates fell to an all-time low of 0.15 per cent in November 2009, but climbed to 0.35 per cent during talk of green shoots in June. That upward trend has now almost entirely been reversed.