By Ralph Jennings in Taipei
It hasn’t been an easy year for Taiwan’s central bank. The authority – which uses exchange rates to manage the economy – grappled in early 2010 with rapid currency gains as investors expected the Chinese yuan to pull the rest of emerging Asia higher.
In October and November the central bank fought back as the Taiwan dollar surged about 3 per cent as hot money flowed into Asia after the United States launched a new round of monetary easing. On Tuesday the currency went at it again, but the central bank may stay on the sidelines this time.
The Taiwan dollar broke its key psychological barrier of T$30 per US dollar, rising as high as T$29.927 in the first hour of trade. An intra-day break past the T$30 mark was last seen in early 2008 on euphoria over the election of Taiwan President Ma Ying-jeou as markets expected him to forge new trade ties with economic powerhouse China. It has not closed a session above T$30 since 1997, before today’s central bank Gov. Perng Fai-nan took control. Read more
Blink and you may have missed it.
But last Friday, Ben Bernanke probably made his most important speech since his ‘helicopter money‘ talk almost eight years ago.
According to author and economist Richard Duncan this is the first time the Federal Reserve chairman has publicly pointed out that the international monetary system may have a structural flaw. In the dollar standard.
As Duncan told FT Alphaville this weekend:
In it he conceded the Dollar Standard is flawed. He said, “As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances.”
The renminbi is 17 per cent undervalued against the dollar while the yen is 8 per cent overvalued…
William Cline and John Williamson at the Peterson Institute for International Economics have done a service to the currency wars debate by releasing an update to their estimates of fundamental equilibrium exchange rates (FEERs) for various countries against the dollar in a very interesting policy brief. Read more
South Korea, holder of the world’s fifth-biggest foreign exchange reserves, is considering expanding its small holdings of gold to diversify its dollar-heavy portfolio.
Such a move could prove significant to the international gold market as Seoul currently only holds about 14 tonnes of the lustrous metal, equal to just 0.2 per cent of its $290bn reserves at current prices. By contrast, Italy and France each hold just under 2,500 tonnes of gold, amounting to more than 65 per cent of their reserves. Read more
East Asian currencies are anything but stable viewed against the dollar: the Thai baht recently topped a 13-year high – and the yen and ringgit have both outpaced the baht’s rise so far this year. Viewed against each other, of course, these appreciating currencies are more stable.
New research challenges the habit of viewing all currencies against the dollar. It goes on to suggest that “considerable regional currency stability” can be achieved in east Asia if countries target the same basket of currencies as each other – even with no “explicit co-operation”.
China’s currency policy between mid-2006 and mid-2008 should be seen in this light, the paper argues; the simple view of the renminbi against the dollar does not explain the facts nearly as well. “The RMB behaved in this two-year period as if it were managed to appreciate gradually over time against its trade-weighted basket of currencies,” argue Guonan Ma and Robert N McCauley of BIS. Read more
The value of a Big Mac is everyhere equal: that’s the premiss of this index from the Economist. Using the burger price as an identity allows us to compare the relative value of countries’ currencies.
Norway comes out most overvalued versus the dollar; Argentina the least. In dollar terms, a Norwegian Big Mac is a meaty $7.20, almost double the American value ($3.73) and nearly four times the Argentinian price ($1.78). Read more
China has repeated its commitment to US debt (as though they’d do anything else when they’re long an estimated $2,450bn). But the data back them up. Figures show the drop in US holdings was among advanced economies; emerging economies increased their holdings, in aggregate, between Q409 and Q110. Indeed, emerging markets’ increase more than offset advanced countries’ decrease, leading to a small net increase overall. Data from IMF.
Related post: Advanced economies destock dollar by $5.5bn (July 2)
Which reserve currencies are left for central bankers, concerned first about the dollar, and now the euro?
Peter Garnham, the FT’s currency correspondent, points out that the likely beneficiary of the more recent euro crisis has been the dollar, “simply because other destinations – Canada and Australia for example – are simply not large enough for them to use as significant diversification destinations.”
Will this dollar-euro ping-pong continue, and, even if it does, are the combined euro-dollar fortunes of the past two years meriting ever smaller reserve allocations? Read more
… and the Aussie dollar is set to crash, relative to the greenback. This is the surprising implication of analysis from a former chief economist at Wamco.
Scott Grannis has essentially compared currency movements with the ‘true’ value of that currency. He’s done this by picking one exchange rate he considers fair, and then adjusting both currencies for inflation and working out the resulting exchange rate over time. Read more
The ECB paid euros to receive dollars from the Fed, promising to reverse those transactions in eight days’ time. It is the first usage of the revived, crisis-era, swap facility from the Fed. The idea is to help European banks to access dollar funding more easily through the ECB.
The Bank of England, Bank of Japan, Bank of Canada and Swiss National Bank did not use the facility this week. Read more
So now it looks like the April 15 deadline for the US Treasury’s currency report is conveniently going to slip, largely because it would look a bit churlish to welcome Hu Jintao to Washington for the April 12-13 nuclear talks and then hang a big scarlet sign saying “MANIPULATOR” round his neck as soon as he steps off the plane. Most likely it will also slip beyond the “strategic and economic dialogue” meeting that the US is having with China in May. And then maybe beyond the G20 at the end of June? Or perhaps, if the US has piped down about the currency for a couple of months, China might announce a float, or a crawling revaluation, some time in June.
But one question is whether Congress is prepared to wait that long. Charles Schumer (Dem, NY, not a fan of China) wants to introduce his bill allowing a limited form of currency retaliation against China by the end of May. The key question for the coming weeks is how much patience Capitol Hill has with waiting both for the currency report and for Beijing to move. Congress might secretly be paragons of patience. But they sure don’t look like it.
Topically, it was Zhu Min who raised this troubling issue at Davos recently. “The big risk this year is the dollar carry trade,” he said. “Estimates are that the dollar carry trade is $1,500bn – which is much bigger than Japan’s carry trade was.”
A carry trade is where investors borrow in a low-interest currency to invest in a high-interest currency. Historically, the borrowing currency of choice was the yen. Recently the dollar, with record low interest rates, has apparently become popular. Read more
The Bank of Israel is rumoured to have bought about $100m of foreign currency today. Traders have told Reuters that this is the fifth forex intervention in 2010, as the bank tries to slow the rapid appreciation of the shekel. The currency has gained about 3 per cent against the US dollar since the start of the year as foreign banks have sold dollars. Israeli inflation during December has just been released: it was 3.9 per cent, up from 3.8 per cent in November.
Traders re-establishing short positions in the dollar may be causing the appreciation of the shekel, which officially closed at 3.736 yesterday. The Bank of Israel – which now only intervenes in unusual circumstances – bought between $200m and $300m at around 1200 GMT Tuesday, said dealers.
The currency closed 2009 at 3.775 to the dollar, with hardly any movement during December, a traditionally quiet trading month as traders seek to hold their positions. But the shekel has appreciated 1 per cent against the dollar over the first two sessions of 2010 and has now advanced for seven straight sessions. “Overseas banks have opened new positions and those positions are short dollar-shekel,” said a dealer at Bank Leumi. Read more
Commodities inflation could rise rapidly if China follows the advice of one of its central bank officials, who recommends spending forex reserves on strategic resources such as oil. The move would further China’s diversification from the dollar.
Many emerging economies, such as Indonesia, list commodity inflation as a principal risk to continued economic recovery. Read more
Safe haven flows that favoured the dollar have been reversing. Carry trades always defy measurement, but such positions, with the dollar as a funding currency, are thought to be increasing, putting upward pressure on higher-yielding currencies. And with asset prices rising, the hedging US dollar holdings by European and Australian institutional investors also weighs on the dollar. Read more
“Investors view this as shockingly bad news”: one assessment of Dubai’s request for a freeze on all financing to Dubai World, the government’s heavily indebted flagship holding company. The requested freeze would last till May 30, and would cover DW’s troubled property unit Nakheel, which is due to pay back $4bn on an Islamic bond on December 14. Dubai sovereign CDS spreads rose 130bps from an overnight level of 318 and LSE shares fell – the exchange has a 20 per cent stake in Borse Dubai.
Meanwhile the “gold up, dollar down” trends continue. Sri Lanka has bought 10 tonnes of gold from the IMF Read more
This might seem like a currency special edition. The dollar fell after China hinted at renminbi appreciation. The People’s Bank of China said foreign exchange policy would take into account “capital flows and major currency movements”, a pointed reference to US dollar weakness and the large speculative inflows of capital that China is receiving. Those speculative inflows are a growing concern for many emerging markets, whose currencies are rising quickly: Taiwan, Russia, Brazil, Thailand and Chile are all planning how best to slow the influx of capital.
Dollar reserves have been going out of fashion over the past few months, and now two IMF economists have called for diversification away from the greenback. This will make Geithner’s (widely mocked) ‘commitment’ to a strong dollar even harder to achieve. Read more
Daniel Pimlott of the Financial Times reviews the day’s economic news Read more