Tag Archive: Dollar


Source: Bloomberg

The dollar may fall below 75 yen next year as it becomes the world’s “weakest currency” due to the Federal Reserve’s monetary-easing program, according to JPMorgan & Chase Co.

The U.S. central bank, along with those in Japan and Europe, will keep interest rates at record lows in 2011 as they seek to boost economic growth, said Tohru Sasaki, head of Japanese rates and foreign-exchange research at the second-largest U.S. bank by assets. U.S. policy makers may take additional easing steps following the $600 billion bond-purchase program announced this month depending on inflation and the labor market, he said.

“The U.S. has the world’s largest current-account deficit but keeps interest rates at virtually zero,” Sasaki said at a forum in Tokyo yesterday. “The dollar can’t avoid the status as the weakest currency.”

The Fed said on Nov. 3 it will buy $75 billion of Treasuries a month through June to cap borrowing costs. The central bank has kept its benchmark rate in a range of zero to 0.25 percent since December 2008. The Bank of Japan on Oct. 5 cut its key rate to a range of zero to 0.1 percent and set up a 5 trillion yen ($59.9 billion) asset-purchase fund.

The dollar traded at 83.38 yen as of 12:04 p.m. in Tokyo after falling to a 15-year low of 80.22 on Nov. 1. The greenback declined to post-World War II low of 79.75 yen in April 1995. The U.S. currency has declined against 12 of its 16 most-traded counterparts this year, according to data compiled by Bloomberg.

Tightening Unnecessary

There’s no need for any monetary tightening in the U.S. as even prolonged easing won’t heighten inflationary pressures with the balance sheets of banks and households still hurting from the fallout of the global financial crisis, Sasaki said.

Ten-year Treasury yields may decline to around 2.25 percent over the next year, and their premium over similar-maturity Japanese yields won’t widen, he said. The benchmark 10-year Treasury yielded 2.89 percent today.

The world economy is likely to expand 3 percent next year amid the extra liquidity provided by central banks, “repeating a pattern from early 2002 to the end of 2004” when improving risk appetite boosted stocks and commodities and the dollar fell 25 percent against the yen, Sasaki said.

With monetary easing in the U.S., Japan and Europe likely to bolster the global recovery and increase demand for yield, the yen is poised to weaken against other currencies beside the dollar to levels last seen in early 2007, Sasaki said.

Japan will refrain from selling the yen even if it strengthens against the dollar, following international criticism of foreign-exchange intervention, he said. The nation intervened in the currency markets for the first time in six years on Sept. 15 when the yen climbed to a 15-year high.

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Source: Telegraph

Right from the start of the financial crisis, it was apparent that one of its biggest long-term casualties would be the mighty dollar, and with it, very possibly, American economic hegemony. The process would take time – possibly a decade or more – but the starting gun had been fired.

At next week’s meeting in Seoul of the G20’s leaders, there will be no last rites – this hopelessly unwieldy exercise in global government wouldn’t recognise a corpse if stood before it in a coffin – but it seems clear that this tragedy is already approaching its denouement.

To understand why, you have to go back to the origins of the credit crunch, which lay in the giant trade and capital imbalances that have long ruled the world economy. Over the past 20 years, the globe has become divided in highly dangerous ways into surplus and deficit nations: those that produced a surplus of goods and savings, and those that borrowed the savings to buy the goods.

It’s a strange, Alice in Wonderland world that sees one of the planet’s richest economies borrowing from one of the poorest to pay for goods way beyond the reach of the people actually producing them. But that process, in effect, came to define the relationship between America and China. The resulting credit-fuelled glut in productive capacity was almost bound to end in a corrective global recession, even without the unsustainable real-estate bubble that the excess of savings also produced. And sure enough, that’s exactly what happened.

When politicians see a problem, especially one on this scale, they feel obliged to regulate it. But so far, they’ve been unable to make headway. This is mainly because the surplus nations are jealous defenders of their essentially mercantilist economic models. Exporting to the deficit nations has served them well, and they are reluctant to change.

Ironically, one effect of the policies adopted to fight the downturn has been to reinforce the imbalances. Fiscal and monetary stimulus in the US is sucking in imports at near-record levels. The fresh dose of quantitative easing announced this week by the Federal Reserve will only turn up the heat further.

What can be done? China won’t accept the currency appreciation that might, in time, reduce the imbalances, for that would undermine the competitiveness of its export industries. In any case, it probably wouldn’t do the trick: surplus nations have a habit of maintaining competitiveness even in the face of an appreciating currency.

Unable to tackle the problem through currency reform, the US has turned instead to the idea of measures to limit the imbalances directly, through monitoring nations’ current accounts. This has already gained some traction with the G20, which has agreed to assess the proposal ahead of the meeting in Seoul. As a way of defusing hot-headed calls in the US for the imposition of import tariffs, the idea is very much to be welcomed, as a trade war would be a disaster for all concerned. China, for one, has embraced the concept with evident relief.

Unfortunately, the limits as proposed would be highly unlikely to solve the underlying problem. Similar rules have failed hopelessly to maintain fiscal discipline in the eurozone. What chance for a global equivalent on trade? With or without sanctions, the limits would be manipulated to death. And even if they weren’t, the proposed 4 per cent cap on surpluses and deficits would only marginally affect the worst offenders: for a big economy, a trade gap of 4 per cent of GDP is still a massive number, easily capable of creating unsafe flows of surplus savings.

No, globally imposed regulation, even if it could rise above lowest-common-denominator impotence, is unlikely to solve the problem, although it might possibly stop it getting significantly worse. But what would certainly fix things would be the dollar’s demise as the global reserve currency of choice.

As we now know, dollar hegemony was itself a major cause of both the imbalances and the crisis, for it allowed more or less unbounded borrowing by the US from the rest of the world, at very favourable rates. As long as the US remained far and away the world’s dominant economy, a global system based on the dollar still made some sense. But America has squandered this advantage on credit-fuelled spending; with the developing world expected to represent more than half of the global economy within five years, dollar hegemony no longer makes any sense.

The rest of the world is now openly questioning the merits of a global currency whose value is governed by America’s perceived domestic needs, while the growth that once underpinned confidence in its ability to repay its debts has never looked more fragile.

Already, there are calls for alternatives. Unwilling to wait for one, the world’s central banks are beginning to diversify their currency reserves. This, in turn, will eventually exert its own form of market discipline on the US, whose ability to soak the rest of the world by issuing ever more greenbacks will be correspondingly harmed.

These are seismic changes, of a type not seen for a generation or more. I hate to end with a cliché, but we do indeed live in interesting times.

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