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Global rebalancing to weaken dollar, quietly

September 24, 2009

– Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own –forex

Twenty-four years ago, major nations called for depreciation of the dollar to rebalance the global economy. Now, as another effort at rebalancing looms, the dollar will again bear the brunt — though officials will try to ensure its fall is less dramatic this time.

That’s the implication of President Barack Obama’s announcement this week that he will push world leaders for a new global “framework” in which the United States would cut its huge trade and budget deficits.

Agreeing on this framework would be politically difficult, since it would require policy changes by many countries — China, for example, would probably have to rein in its explosive export-led growth.

But as the euro’s climb to a new one-year high versus the dollar this morning shows, markets are starting to think the rebalancing process may start as soon as this week’s Pittsburgh summit of leaders from the Group of 20 nations.

The Plaza Accord of 1985 called for “orderly appreciation of the main non-dollar currencies against the dollar”; it was followed by central banks’ coordinated intervention to ensure that happened.

This time, with the world shakily emerging from a financial crisis, policymakers are likely to try to manage the dollar’s drop in a more low-key fashion.

They are unlikely to issue an explicit call for the dollar to fall. In fact, the U.S. Treasury may continue proclaiming its “strong dollar policy” in an attempt to keep the markets calm.

No one in the G20 wants to risk a freefall of the dollar that could disrupt global trade as it recovers from recession. And in contrast to the 1980s, developing nations such as China are now challenging the dollar’s long-term role as the world’s top reserve currency.

The dollar’s premier status helps the United States to obtain foreign capital and in order to keep that access, Washington is likely to encourage central banks around the world to continue holding dollars. This would require slow depreciation of the currency rather than a panicky slide.

So unless policymakers completely lose control of the forex markets — which cannot entirely be ruled out — the dollar’s slide is likely to be slower and smaller than it was after the Plaza Accord, when the currency sank about 50 percent versus the yen between Sept. 22, 1985 and the end of 1987.

The overall direction of the dollar does not look in doubt, however. Top presidential adviser Lawrence Summers has said he wants a U.S. economy that is “more export-oriented and less consumption-oriented”.

A lower dollar is a logical tool to achieve that goal, and letting the currency weaken would probably be faster and easier than most other big policy steps to reshape the U.S. economy, such as tax changes and health reform.

The International Monetary Fund, which is advising G20 nations on economy policy, is hinting heavily at the need for currency realignment.

In a report released this week, it said “current policies and the assumed constellation of exchange rates may not be sufficient for the needed rebalancing of demand.”

It added that policy reforms by the world’s big economies to restore growth “would be more effective if accompanied by a real effective renminbi appreciation, offset by euro and dollar depreciation”.

An international understanding on dollar depreciation may well not be reached in Pittsburgh. A French official said last Friday that Pittsburgh would merely set the stage for future talks on foreign exchange rates.

“At this stage there will not be currency discussions, but the framework that we hope to put in place…is a way of discussing later the question of exchange rates,” said the official, who declined to be named.

But giving China and other developing countries more power in the IMF and the World Bank could be part of an informal quid pro quo in which China quietly undertook to resume appreciating the yuan against the dollar.

The rise of the euro as high as $1.4821, breaking the December 2008 peak of $1.4719, is a technical signal that the market thinks the dollar is increasingly vulnerable.

For many traders, the break suggests a good chance of a rise to at least the psychologically important level of $1.50 in coming weeks or months.

The European Central Bank might seek to limit speculation against the dollar by expressing concern about such a move. But the market does not appear to worry that the ECB could actually intervene to support the dollar.

When the European Union’s Economic and Monetary Affairs Commissioner Joaquin Almunia said last week that excessive appreciation of the euro could hurt Europe’s economy, the euro fell back only marginally and briefly.

The market knows that even at levels just above $1.5000, the euro would remain well below its all-time high against the dollar of $1.6038, hit in July 2008.

And any rise of the euro against the dollar in the current circumstances would probably be seen by policymakers as the result of general dollar weakness, not excessive euro strength. When euro/dollar reached its July 2008 peak, euro/yen hit a similar high; now, euro/yen is a full 35 yen lower.

The Japanese may also be willing to see their currency strengthen. Before new Finance Minister Hirohisa Fujii took office this month, he said a strong yen was generally good as it boosted the purchasing power of Japanese.

Fujii subsequently backed away from that comment, but speculation will remain that after sweeping to power last month, the Democratic Party of Japan may try to shift the country away from its reliance on exports and its opposition to yen strength.

In the context of a G20 drive to rebalance the global economy, this could easily cause the market to think the yen should be trading stronger than 90 to the dollar.

Comments
22 comments so far | RSS Comments RSS

Meanwhile, the Yuan remains artificially devalued.

And as long as this continues, the longest running trade imbalance in economic history continues to run at full steam.

And yet people around the world still call for the devaluation of the dollar. That’s the world for you.

Posted by Anon | Report as abusive
 

Foreign Exchnge Market is based on the supply and demand in economics. For detailed elaborations,visit http://www.ask.com and search “Keys for Economic Understanding” for reference.

Francis Shieh, Fulbright Senior Scholar, Hong Kong, 1989-1990

 

Expo 2010 will take place in Shanghai. It is high time to learn Shanghainese e.g. Wu dialect being offered at http://www.Dictyon.net, the gateway to global languages.

“A Glimpse of the Chinese Language” is available free at PDF format at http://www.rand.org for reference.

 

The dollar needs to fall, making purchases in general in America more expensive. There is nothing uglier than seeing big fat Americans with a tall latte in their hands, long lines at McDonalds and other ridiculous consumption-oriented places. Buy buy buy- that is all America does- and it is killing our planet.

Stop Consuming- you are FAT! Everyone here is horribly fat!

America used to have beautiful women- now they are tubs-of-lard. Go to Europe- perhaps Eastern Europe where there is no money to always walk around with some kind of food in your hand- and you will see beautiful girls.

TAX THE FATTIES!

Posted by bob | Report as abusive
 

A Fulbright Senior Scholar who cites ask.com as a proof source ?

Methinks this scholar was made in China with melamine added to improve the test results.

Wu ! Wu !

JMK

Posted by JM Keynes | Report as abusive
 

So: “Top presidential adviser Lawrence Summers has said he wants a U.S. economy that is “more export-oriented and less consumption-oriented”.
What on earth does this Summers guy think the U.S is going to export? Almost all the manufacturing has been shifted to Asia in the last 15 years.

Posted by su | Report as abusive
 

Bob nailed it. Stop letting the women eat so much. It is okay if the guys do it, but who cares if we are ugly. The beautiful women of a country are the honor of that country. Really though our addiction to consume everything in sight means we have no savings and results in manufacturing and shipping tons of crap we don’t need in our country. we consume it then toss it away. what a waste.

Posted by Al | Report as abusive
 

the easiest way for US to get out of high consumption pattern, rebalance external trade deficit is to let the dollar devalue slowly but surely. this may not be enough however to solve the fiscal deficit and taxes may have to be hiked. Globally, what this means for US citizens: reduced buying power mainly for imports and travel abroad. It also means higher priced commodities (oil in particular) and US should turn its back on foreign oil and encourage transition to natural gas that is plentifully cheap in America.

Posted by Gil Nado | Report as abusive
 

Wake the hell up people! This is not about the different countries or the economy of the world. It is about the carefully constructed crime that is being foisted upon the global community. Wars and economies are manipulated to increase the pockets of thieves.

Read. Educate yourselves. A good place to start is with the true history of the central banks and the Bank of International Settlements.

I could and did predict these very events 10 years ago by educating myself to the truth.

Can we all start to educate ourselves and others so we can end this see-saw of events created and controlled by the largest organized crime syndicate in history?

Posted by Epiphany Hoskins | Report as abusive
 

Larry Summers is right when he says that US has to shift from consumption oriented to export oriented economy.

We all know that the four components of GDP (Y) are: Consumption (C), Investment (I), Government Expenditure (G) and Net Exports (NX).

GDP: Y = C + I + G + NX

US GDP is highest in the world at 14 trillion dollars every year. In this crisis, US households have likely shifted their preference from high consumption (C) to higher savings. As C falls, Y has to fall if something else doesn’t replace it. Fiscal Stimulus (G) is currently holding back Y by balancing the reduction in C. But that cannot continue indefinitely.

Hence to remain competitive, US has to increase NX over near and mid term to keep Y growing. This transition is likely to be painful in the short term, in the sense that those tall lattes will be fewer, but in the medium and long term, this will maintain US leadership and prosperity. We should not forget that US still produces highest number of Nobel Laureates, its universities are top class and its citizens are fastest in responding to changed circumstances.

A weaker dollar is, therefore, a correct policy step in making this transition from consumption based economy to export based economy.

Posted by Ash | Report as abusive
 

As an american living in europe I have already seen the dollar fall from 1.20 Euros now to .67 centimes.
If it falls much more I suggest calling it the “Dolar”. It should lose at least one letter if its going to lose so much value.

Posted by jean delarue | Report as abusive
 

USA should ask China to make its currency convertible; the appreciation of Yuan (Chinese Currency) will control the export power-house; the more shareholding in IMF / WB may encourage China to keep its currency artificially lower; China also have a very large investments in US$ terms. But, this method will target China directly; China may not like this; China may like appreciation of its currency in relation to US$ only and not in relation to EURO or YEN.

Posted by CA. Rajay Kumar Aggarwal | Report as abusive
 

This is where we are headed folks:

1. The dollar weakens and American exports rise.
2. American corporate profits rise as a result.
3. Corporate hiring rises, mostly overseas.
4. American unemployment remains high.
5. American stock market rises as a result of profits.
5. Imports will be much more expensive.
6. American middle class living standard in the USA drops.
7. Fed Deficit explodes supporting 82m baby boomer retirees.
8. Fed goes after its share of corporate profits.
9. International bankers refuse to buy federal debt.
10. Dollar crashes.
11. Fed forced to pay junk bond rates to sell debt.
11. Interest rates craters the American economy.
12. American citizens rebel at D.C. fiscal insanity.

Over many years the USA will reclaim major industries as the weak dollar protects us from import competition. We begin producing our own overpriced cheap goods as a result of such “protection” from foreign imports. As the 82M baby boomers die off of government support, the USA reaches a tipping point that repositions us positively in the world economy.

When will that tipping point occur? Not in my lifetime.

Posted by Sherlock | Report as abusive
 

The FX opinion of Kimberley is absolutly right.

Dollar-Euro rate will go to 1,60-1,70 in coming months.

Dollar will go to new lows against Euro and Yen, for years.

Commodities will go up, but, mainly gold. Gold will be seen in the future as a global seudo-currency. There is no way to stop that.

The high depreciation of Dollar will have many inplications in the world (emergentes economies as well as others).

Foreign Exchnge Market is based on the supply and demand, but only in the short term. In the long term all currencies adjust in terms of inflation differencials.
See http://www.aequi.fx

Posted by GGG | Report as abusive
 

Our fate has been sealed. Destruction awaits all civilizations with ever increasing debt’s. No country has ever paid it’s debt off in all of history. Politicians wanting to find escape goats like Maddoff, taxing the rich has never worked.The fat cats will never be prosecuted because it’s an embarrasment to the admin.that they were wrong. Gold is rising to record prices in all currencies. That’s a sign of bull market.G20 is a disgrace and nothing will be done except more printing of paper.Dollar hell begins this fall. GOT GOLD?

Posted by brian scrocca | Report as abusive
 

The dollar would have already crashed if it wasn’t for a few crucial factors. That is, USD is still world reserve currency, and lately it is involved in carry trades. America’s military dominance and political claut arund the globe bodes well for the greenback.
However, current budget and general economic vulnerability of this country coupled with growing influence of China & other growing economies puts immense pressure on the dollar. Let’s hope that Neal is right about dollar’s decline in an orderly manner. Otherwise, we’ll loose a lot of purchasing power and affluence.

Posted by Paul | Report as abusive
 

I believe that China must devalue its currency which it haskept artificially low.America must become more of an exporter than a consumer. People must realize that they can’t be as wasteful as they have been over the years.
The dollar will then survive

Posted by chattenx | Report as abusive
 

If dollar falls, so does the USA. This is a criminal act by the international banking mafia to go around the world destroying sovereign countries and their economies. I can only hope the this global economic crisis develops into a world wide revolt that will see these criminals all decapitated.

Posted by Sammy | Report as abusive
 

Good points Xie and GGG. Unless we find ourselves in the Truman Show, terrible chauvinist comments above.

Why the need for a ‘reserve currency’ in any event ? Are we so insecure about our productivity that we have to fall back on gold, a false sense of security, all the time ?

The US can really only export technology at this stage. Maybe its friends need to compensate the US for its imported war bills, and settle their part of it.

Posted by Casper Lab | Report as abusive
 

Ash, your reasoning is flawed. The U.S. has lost it’s manufacturing base. Alexander Hamilton crafted the the legislation subsequently passed by Congress to build an American industrial base. It consisted of incentive to manufacture and tariffs to block cheap foreign competition.
News flash…., it worked!

The Continental Dollar was worthless and had no effect whatsoever in building industry. It was later that Hamilton’s ideas were crafted into legislation.

Technology is ever changing but human nature does not. Building a society is not “technical”, it is by definition social. I believe we can find the answers to our “social” dilemmas by considering the actions of those societies that succeeded in the past.

Posted by Anubis | Report as abusive
 

This sounds like a major step toward one-world government. The Amero will be here soon, whenever the defunct dollar is of no value to us as a local currency. Unless we get rid of all the Democrats and Republicans , who are destroying our country, there is little hope for the United States.

Posted by Mufaso | Report as abusive
 

Well said Casper Lab. I find the rise in Gold an ancient way of hedging the dollar rise. It is a fool’s game.

I concur, some of the earlier comments are uncalled for, offensive and unjustifiable.

Anibus:

We’re ever becoming more dependent on each other in trade. Manufacturing is integral as a country is developing. There are several economies of scope and scale during a country’s expansion of capacity growth through infrastructure and some of this can be captured through the manufacture of non-durable and semi-durable goods. As infrastructure demand begins to decline (as a rate of demand), countries then move onto higher skilled areas as the value of human skill, capital and technology have higher returns in these areas.

No doubt that there must be some level of manufacture within a country, however, to mandate a minimum level of manufacturing (a so called manufacturing output base) is moving backwards. Besides, how would this be made feasible? Subsidies, lower taxes, tax holidays? This is what distorts the market and transfers the tax burden on individuals.

Posted by Dan | Report as abusive
 

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