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Your Money > Investing Ideas Articles > The Dollar, the renminbi and the G-20
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By Jane Foley
Pullbacks in the stock market continue to trigger moves back to the USD and the JPY. Weaker stocks at the start of this week allowed EUR/USD to push comfortably back below 1.5000. Speculation that the Nov 4 FOMC meeting may bring further debate about the timing of the Fed’s exit from present very loose monetary policies and talk that the Nov 7 G-20 Finance Ministers meeting will bring further verbal intervention in support of the USD are also enhancing the value of the USD. Under the weight of poor fundamentals it is unlikely that either the G-20 or the FOMC will turn around EUR/USD. That said, the G-20 gathering may serve as a reminder of the political debate surrounding the value of the USD and the interest in ensuring that any further declines of the USD remain orderly. The possibility that next week’s FOMC meeting will provide lasting support for the USD is small. It is prudent that the Fed plans it exit procedures but these discussions do not change the fact that the absence of inflation pressures and the presence of lacklustre growth are set to prevent any tightening in policy for some months yet. The G-20 meeting is likely to see fx policy sidelined by the issue of banking regulation. That said some reiteration of support for the US Treasury’s strong USD policy is likely. While further jawboning will continue to be successful if success is judged by the goal of ensuring the USD’s decline is orderly, any comments made by the G-20 are unlikely to turn around the USD’s fortunes vs the EUR. That said, a declining USD highlights the issues surrounding the impact of the current renminbi-USD peg and this will be an issue that is likely to see increased political attention in the months ahead. The weakness of the USD has already prompted some Asian countries such as S.Korea and Taiwan to intervene in order to prevent the appreciation of their currencies impacting competiveness. This action can be viewed a protest against the renminbi-USD peg and a guard against losing competitiveness to China. As the EUR rises against the USD, it is also rising against the renminbi and, spurred on by the actions of other Asian central banks the chances are that it will continue to appreciate against a host of other Asian currencies. Since the start of last year, the EUR has risen by 37% vs the S.Korean won. Recent comments from the French Finance Minister stressed that she did not want to see the EUR bearing the brunt of the downward adjustment of the USD. The US is still the Eurozone’s second largest trading partner after the UK suggesting that a move to EUR/USD1.500 cannot be welcome, but the pegging of the renminbi vs the USD makes the downward adjustment of the USD a far more painful experience for the Eurozone. This is not the only objection to the renminbi -USD peg. The traditional objections relate to the huge US and Chinese imbalances which are evident in the ability of China to build-up huge foreign currency reserves largely denominated in USDs. Domestic policies which could lessen savings and promote domestic consumption are the usual prescriptions offered to China. Higher government spending on social systems such as education and healthcare could offer part of a solution as this should limit the amount of savings viewed as necessary and boost consumption. Clearly a weaker exchange rate could be a significant part of the solution since this should limit export growth and promote demand for overseas goods. Clearly China cannot rush a move to a flexible exchange rate regime. The Chinese authorities understandably fear that a quick move could prompt capital flight and undermine its banking system. A fully convertible, flexible exchange rate must be a long term goal rather that a quick fix solution but China can expect to feel increased pressure to adjust its currency peg vs the USD. The renminbi and the USD are of course linked in more ways than one. China’s exchange rate regime can be blamed for exacerbating global imbalances which have undermined the value of the USD. It is ironic then that China along with other creditor nations that now has an interest in supporting the value of the USD in order to avoid a sharp depreciation in the value of its assets. Theoretically, the sudden, sharp rise in the US budget deficit towards 11% of GDP this year, Obama’s difficulties in making progress with healthcare reform and projections for below trend US economic growth at least through 2010 could be sending bond investors to run for the hills. The maintenance of good demand from overseas central banks for US Treasury paper this year suggests that creditor central banks are continuing to play their part to ensure that the decline of the USD remain orderly. A move to EUR/USD1.55 may be a lot further away than it seems. For Today's Market Update from the FOREX.com Global Research Team, click here | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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