from The Great Debate UK:
Slow growth and deficit stem lure of dollar
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
The U.S. dollar may have found support this week but the USD index remains at a 14-month low.
The impact of the financial crisis in drawing buyers to the "safe-haven" dollar has in effect been almost cancelled out by the healing in risk appetite. The dollar looks to have re-embarked on the downtrend that had been in place for more than two years prior to the start of the financial crisis, only now the U.S. fundamentals have arguably deteriorated further.
Slow growth and a hefty budget deficit are likely to hamper the attraction of the dollar for some time. That said, there is a huge invested political interest in ensuring that any further declines in the dollar remain orderly.
The weakness of the dollar has already prompted some Asian countries such as South Korea and Taiwan to intervene in order to prevent the appreciation of their currencies impacting competiveness. This action can be viewed as a protest against the renminbi-dollar peg and a guard against losing competitiveness to China.
As the euro rises against the dollar, 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 euro has risen by 37 percent against the South Korean won. In recent comments, French Finance Minister Christine Lagarde stressed that she did not want to see the euro bearing the brunt of the downward adjustment of the dollar.
China’s coming magnificent bubble
–James Saft is a Reuters columnist. The opinions expressed are his own–
If and when China makes its currency convertible and opens its financial system the stage will be set for a bubble that should make the dotcom and housing booms look tame.
China has recently signaled its key aspirations: for a greater international role for the renminbi and for Shanghai to become a great financial capital. Neither is imminent, but both imply, if not require, a series of steps that, taken in combination with China’s legitimately great potential for growth, could lead to a bubble of magnificent and dangerous proportions.
Magnificent in that, like the dotcom bubble or the railroad boom in the U.S. in the 19th century, a bubble in domestic China is directionally right and will build useful things which will change the world. A bubble, after all, needs a good story and China has one of the best ever.
Dangerous because, like the housing bubble, it will inevitably go too far and could take down banks and banking systems globally.
Perhaps rather than dotcom or housing, the most useful template for China is closer to home; namely the Japanese bubble which preceded its ongoing malaise, according to Dylan Grice, a strategist at Societe Generale in London.
“In the medium term we face the mother of all asset bubbles in China. The fundamental story is a good one; there are just lots and lots of people to sell to,” Grice said.
Hello James,
I wish we would take notice of China bubble burst from the solid foundations of unshakable US economy. Unfortunately US economy is more fragile than ever. My point is that before China bubble burst we will witness US total collapse.
Total US debt (Gov + private) comes to 370% of GDP. Common sense tells that we cannot pay it out. But there is no alternative so people keep buying US/EU debts. As soon as somebody (China) provides alternative XYZ to US debt we will see run of capital from USD to XYZ.
USA the cost of managing debt will jump 10x from current 2%-5% (That rough range for LIBOR). We all know what even 10% LIBOR would do to “conservative” financial institutions with 15x leverage (Goldman 
.
Since all my savings in USD I wish somebody can prove me wrong using simple math.
“In recent comments, French Finance Minister Christine Lagarde stressed that she did not want to see the euro bearing the brunt of the downward adjustment of the dollar.”
Of course not. What she wants is most of other major currencies also rise against the dollar. This way the US gets to depreciate its currency in a more controlled manner, a preferred course given the dollar MUST be depreciated anyway. Therefore it is the task of G20 to manage a coordinated currency rise against the dollar, so the their own competitiveness is maintained. Doing this requires the best of G19 wisdom. G19 because the US has already decided on a course of depreciation and it will do it with or without G19 cooperation.