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