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Index- Econ/Dollar Internals ............................................................................................................................... 1
NEGATIVE ANSWERS
Econ MPX- Asian Stability [1/3] ......................................................................................................................... 2
Econ-MPX- Asian Stability [2/3] ......................................................................................................................... 3
Econ MPX- Asian Stability [3/3] ......................................................................................................................... 4
Econ MPX- Global Economy ............................................................................................................................... 5
Dollar MPX- Global Economy............................................................................................................................. 6
Dollar MPX- Chinese Econ .................................................................................................................................. 7
Dollar MPX- Japanese Econ ................................................................................................................................ 8
Dollar MPX- Hurts US Econ ............................................................................................................................... 9
I/L- Investors k2 US Econ .................................................................................................................................. 10
I/L- Dollar K2 Investor Confidence .................................................................................................................. 11
A2: G8 Summit- Change $ ................................................................................................................................. 13
AFFIRMATIVE ANSWERS
AFF A/T: Dollar ê Japanese Econ ..................................................................................................................... 14
AFF A/T: Chinese Economy .............................................................................................................................. 15
AFF A/T: Countries Abandoning Dollar .......................................................................................................... 16
AFF A/T: Dollar Key to Global Econ ............................................................................................................... 17
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US Economy key to Asian Stability- Multiple Indicators Prove
Goldman 7-3-09 – Writer and Economist for Asia Times
[David, The Market Oracle: “Can China’s Economy Prosper Without the US Dollar?”, pg online @ (http://www.marketoracle.co.uk/Article11766.html)]
China ’s announcement overnight that it will allow companies to settle international trade claims in yuan shows how serious the Chinese authorities are about building a local currency
market.
China will allow companies to use the yuan to settle cross-border trade and let them keep their entitlement to export tax rebates, seeking to reduce the reliance of importers and exporters
on the U.S. dollar.
The People’s Bank of China will encourage banks to offer yuan settlement services from today, the bank said in the regulations published on its Web site. Transactions inside China will
take place in Shanghai and four cities in southern Guangdong province, including Guangzhou and Shenzhen, while those outside China will occur in Hong Kong, Macau and the
Association of Southeast Asian Nations, it said.
“It’s China’s first step to make the yuan global,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s largest foreign-currency trader. “It will protect exporters from
swings in exchange rates and boost the yuan’s role in the world currency system.”
China is promoting greater use of the yuan in international trade and finance after Premier Wen Jiabao in March expressed concern
that a weakening dollar will cause losses on the country’s holdings of U.S. assets . A Chinese Foreign Ministry official said today
he hoped the U.S. currency would remain stable, while reiterating a call for diversification of the international monetary system,
Bloomberg reports.
“Companies in China and neighboring countries are facing relatively huge risks of exchange-rate fluctuations because of big swings in
the U.S. dollar, the euro and other major settlement currencies,” today’s central bank statement said.
Implied volatility has fallen from nearly 40% at the end of 2008 to around 12% at present. That doesn’t look like an immediate prospect of “relative hulge risks of exchange-rate
fluctuations,” as the People’s Bank of China said today.
China clearly is talking about something else. In my June 30 “Spengler” column for Asia Times Online I warned that US foreign policy and economic policy both are subject to
catastrophic failure:
The last thing China wants at the moment is to undercut the US dollar , for three reasons. First, as America’s largest creditor,
China has the most to lose from a dollar collapse. Second, Americans would buy fewer Chinese imports. And third, the collapse
of the dollar would further erode America’s will to fulfill its superpower function, and that is what China wants least of all.
America remains the indispensable outsider in Asia. No one likes the United States, but everyone dislikes the United States less
than they dislike their neighbors. India need not worry about China’s role in Pakistan, for example, because America mediates
Indian-Pakistani relations, and America has no interest in a radical change to the status quo. Neither does China,
for that matter, but India is less sure of that. China does not trust Japan for historical reasons that will not quickly fade, but
need not worry about it because America is the guarantor of Japan’s security. The Seventh Fleet is the most disliked - and
nonetheless the most welcome - entity in Asia.
All of this may change drastically, quickly, and for the worse.
If the US economy fails to recover and China has no choice but to develop its internal market, than it will have to finance the
internal market in local currency and do everything possible to give it regional and perhaps global status . If other countries in
the region re-orient their exports away from the US and to the Chinese (and related) internal market, they
will tend to link their currencies to the yuan. This might lead to a regional currency arrangement which well
might be commodity based.
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A Stable US Economy is Key to Prevent Asian Instability
Chellaney 09 – Special to Japan Times
[Brahma, Japan Times: “Growing Challenges to Asian Stability”, January 1, 2009. Pg online @ (http://search.japantimes.co.jp/cgibin/eo20090101a3.html)]
NEW DELHI — U.S. President-elect Barack Obama takes office at a time when a fundamental and qualitative reordering of power is under way in the Asia-Pacific, with tectonic shifts
challenging strategic stability. The impact of such shifts on U.S. foreign policy is bound to be accentuated by America's growing challenges, including a deep economic recession at home
and the two separate wars being waged overseas. Such challenges dictate greater U.S.-China cooperation to ensure continued large Chinese capital inflows, and Beijing's political support
on contentious issues ranging from North Korea and Myanmar to Pakistan and Iran. Such calculations, in turn, are certain to have a bearing on America's dual role in Asia — "as a resident
power and as the straddle power across the Asia-Pacific," to quote Robert Gates, who is to stay on as defense secretary in the Obama administration. According to Gates, the "next U.S.
Asia has come a long
way since the creation of two Koreas, two Chinas, two Vietnams and India's partition. It has risen dramatically as the world's main creditor and economic
locomotive. The ongoing global power shifts indeed are primarily linked to Asia's phenomenal economic rise, the speed and scale of which has no parallel in world history. How fast
administration seems certain to continue the overlapping, long-standing security partnerships" in Asia but "will also inherit an agenda of worrying issues."
Asia has come can be gauged from the 1968 book, "Asian Drama: An Inquiry Into the Poverty of Nations," by Swedish economist and Nobel laureate Gunnar Myrdal, who bemoaned the
manner in which impoverishment, population pressures and resource constraints were weighing down Asia. With the story of endemic poverty turning into a tale of spreading prosperity,
today's Asian drama is very different. Even so,
Asia faces major challenges. It has to cope with entrenched territorial and maritime disputes,
sharpening competition over scarce resources, improved military capabilities, increasingly fervent nationalism and the spread of
religious extremism. Diverse transborder trends — from nuclear proliferation and terrorism to illicit refugee flows and human
trafficking — add to the challenges. But Asia is also becoming more interdependent through trade, investment, technology and
tourism. The economic renaissance has been accompanied by a growing international recognition of Asia's soft power as symbolized by its arts, fashion and cuisine. The United
States will remain a key player in Asia through its security arrangements and other strategic ties with an array of regional states. Its
policies and actions will continue to have an important influence on the strategic calculus of the important Asian actors. However, not since Japan rose to world-power status during the
reign of Emperor Meiji in the second half of the 19th century has another non-Western power emerged with such potential to alter the world order as China today. As the latest assessment
by the U.S. intelligence community predicts, China stands to more profoundly affect global geopolitics than any other country. China, according to the National Intelligence Council, is
Economic
powerhouse Japan — whose economy is larger than that of China, India and Russia combined — is intent on shoring up its
security and ensuring that Beijing does not call the shots in East Asia. Japan is set to reassert itself in world affairs by shedding decades of pacifism anchored
"poised to have more impact on the world over the next 20 years than any other country." China's ascent, however, is dividing Asia, not bringing Asian states closer.
in a U.S.-imposed Constitution. Another key actor in Asian geopolitics, India, is unwilling to cede its leadership role in the Indian Ocean rim region, despite China's creeping influence in
southern Asia through growing transportation, trade, port-building and defense links. Under Obama, America's main strategic objectives in the Asia-Pacific are unlikely to change. Indeed,
the central U.S. interest in the Asia-Pacific remains what it has been since 1898 when America took the Philippines as spoils of the naval war with Spain — the maintenance of a balance
of power. During the first half of the Cold War, the U.S. chose to maintain the balance by forging security alliances with Japan and South Korea, and also by keeping forward bases in
Asia. By the time the Cold War entered its second phase, America's "ping-pong diplomacy" led to President Richard Nixon's historic handshake with Mao Zedong in 1972 in an "opening"
designed to reinforce the balance by employing a newly assertive, nuclear-armed China to countervail Soviet power in the Asia-Pacific region. Today, according to the Pentagon's
Quadrennial Defense Review Report, America's interests center on "maintaining a stable balance" in "the East Asian littoral," given the likelihood that "a military competitor with a
formidable base will emerge in the region" — an allusion to China. Washington would not want Japan or India to kowtow to a China seeking to supplant the U.S. as the leading force in
Asia. But America also would not want to see the rise of a combative India or Japan. For example, an overt Japan-China conflict in the East China Sea over competing maritime and gasexploration claims would compel Washington to side with Tokyo or risk wrecking the U.S.-Japanese security relationship, centered on U.S. forward-deployment on Japanese soil.
America's interests in Asia actually lie in hedging its future options and balancing the various powers. The emergence of China as a global player with rising heft is not only transforming
the geopolitical landscape in the Asia-Pacific, but also spurring greater American reliance on Beijing for financial and political support. In fact, China is becoming America's banker, with
Obama's mammoth stimulus package to help revive the U.S. economy set to reinforce Washington's dependence on Chinese capital. The bipartisan support for a massive fiscal stimulus to
A
creditor-debtor relationship between Washington and Beijing, along with China's more muscular foreign policy and growing sway
over states around its periphery, holds major relevance for America's traditional allies, principally Japan and Taiwan, and new
strategic partners, like India. After all, a banker has greater leverage over a customer than vice versa. In the years ahead, China may not hesitate to assert
the leverage over an increasingly indebted America. But such leverage is likely to stay limited. Although it is America's largest external creditor — with much of its
$2 trillion foreign-exchange reserves invested in U.S. dollar-denominated financial instruments — China is locked in a symbiotic or mutually dependent
economic relationship with the U.S. It is as much in China's interest as in America's to prop up the value of the dollar because if
the dollar sinks, the worth of the Chinese dollar-denominated assets would plummet. Also, despite its overflowing coffers, China does not
have much room to diversify the foreign investment of its surpluses and savings. For one, the European capital markets remain
shallow for a cash-heavy China, with any big induction of Chinese capital likely to have a destabilizing effect. For another, the global oilhelp prevent the U.S. recession from turning into a depression will result in a larger budget deficit (already crossing $1 trillion) and greater reliance on foreign capital inflows.
price crash crimps China's diversification ambitions. Had oil prices stayed at more than $100 a barrel, the oil-exporting nations — particularly the oil sheikdoms of the Persian Gulf —
would have helped bolster the value of the dollar by channeling their high oil earnings into dollar-denominated assets, thus creating space for China to diversify some of its holdings of
hundreds of billions of dollars of ridiculously cheap Japanese credit continue to slosh around the U.S.
financial markets. However, Tokyo has stopped buying U.S. Treasury bills, making Beijing the principal purchaser of such notes.
U.S. debt. For the same reason,
Besides China's ascent, the political rise of Russia, Japan and India may pick up momentum in the next decade, despite the uncertain demographic future of the first two. China's rise,
While Europe has achieved equilibrium between and among its
main powers, the situation in Asia threatens to slide toward overt power disequilibrium. In Europe, the largest state and economy — Germany —
does not aspire for dominance. Rather, in respect to the other European powers, it has learned and accepted to be one among equals. In Asia, the situation is the reverse. China does
not hide its ambition to gain Asian pre-eminence. With the exception of Japan, the other Asian economies are at earlier stages of development. That is why most of
however, spotlights the dissimilarities between Asia and Europe. Consider the following:
them are classified as "developing states" or "emerging economies." Again, with the exception of Japan, most Asian states, in contrast to many European nations, are distinguished by
wide and growing income disparities, and social inequalities.While democracy has become the norm in Europe, that can hardly be said about Asia. In fact, only a small minority of Asian
states are truly democratic. The diverse political systems in Asia make it difficult to build common norms and values or an Asian community. Against this background, Obama and his
secretary of state-designate, Hillary Rodham Clinton, are likely to continue the work of their predecessors to reinforce America's existing military relationships in Asia while searching for
China, too, plays balance-of-power politics in Asia, but its balancing is primarily
designed to keep peer rivals like Japan and India bottled up regionally, and to carve out more space for itself vis-a-vis the U.S. During the Bill Clinton
new allies or partners that can help build an Asian balance of power.
presidency, Washington went out of its way to befriend China, even if such courtship slighted Japan. As Condoleezza Rice put it before joining President George W. Bush's
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administration, "Never again should an American president go to Beijing for nine days and refuse to stop in Tokyo or Seoul." Yet Bush is leaving the White House with a solid Chinafriendly legacy, best illustrated by the manner he ignored the bloody suppression of last March's Tibetan uprising and showed up at the Beijing Olympics. Obama is sure to continue the
36-year record of U.S. presidents being China-friendly — a certainty underscored by America's greater need, in the midst of a financial meltdown, for capital from a foreign power already
holding 10 percent of its public debt. From being allies of convenience in the second half of the Cold War, the U.S. and China have gradually emerged as partners tied by interdependence.
But as U.S.-China ties acquire a wider and deeper base in the coming years, the strains in some of America's existing military or strategic partnerships would become pronounced.
While South Korea's importance in the U.S.-led hub-and-spoke alliance system will continue to decline, doubts are bound to grow
in Japan and Taiwan over the reliability of Washington's commitment to their security. In the near term, rising Chinese
assertiveness has had the unintended effect of persuading Japan to jettison its doubts about U.S. security commitments and to
reinvigorate its military relationship with Washington. In the long run, however, Tokyo is unlikely to remain comfortable with its
security dependency on the U.S. Some recent U.S. actions — including the failure to consult with Tokyo before removing North
Korea from the U.S. list of terrorism-sponsoring states and the refusal to sell Japan the next-generation F-22 Raptor fighter jets —
are likely to sow further doubts among the Japanese. Despite a recent $6.46 billion arms package for Taiwan — which prompted Beijing to break off military
contacts with the U.S. — Washington has declined to sell Taipei Aegis ships, diesel-powered submarines and UH-60 Black Hawk attack helicopters. But now that China has decided to
send ships to the Gulf of Aden in support of the multinational antipiracy operations there, the head of the U.S. Pacific Command hopes that move would be "the springboard for
. Yet, conflicting Indo-U.S.
expectations and interests often surface. Take the controversial nuclear deal, which was driven by American nonproliferation considerations but peddled by Indian
resumption" of military contacts. The U.S. has worked hard in recent years to co-opt India in a "soft alliance" shorn of treaty obligations
neocons and government managers as a far-reaching strategic initiative to help to counter China's growing might and assertiveness. Just as India has found itself alone in the fight against
transnational terrorism, with U.S. diplomacy more focused on averting Indo-Pakistan conflict than in the dismantlement of the India-directed Pakistani terrorist infrastructure, New Delhi
is unlikely to get much comfort on China from American policy. In that light, the Indian ardor in recent years for closer defense ties with the U.S. is likely to gradually give way to reality
at a time when India confronts growing Chinese military assertiveness along the disputed Himalayan frontier and an emerging Chinese threat from the oceans. By contrast, Australia's
growing cozy relationship with distant China, especially under Sinophile Prime Minister Kevin Rudd, meshes well with the likely trajectory of U.S.-China ties. What Canberra pursues
, the U.S.-China relationship
is likely to remain uneasy, although neither side would seek overt competition or confrontation. Washington is expected to remain more critical of
today — to balance its relations with Tokyo and Beijing — Washington is likely to begin doing before long Despite increasing interdependence
Moscow than of Beijing, including on a subject where China's record is egregious — human rights. For the U.S., China's rising power helps validate American forward military
deployments in the Asian theater. It also helps America to keep existing allies and search for new ones. The China factor is coming in handy for Washington to enlarge its strategic
between an increasingly assertive China, and an America focused on advancing its economic and political
interests in Asia, other Asian powers are likely to face tough security choices in the coming years. The recent landmark JapanIndia security agreement signals that major changes in the Asian strategic scene are in the offing.
footprints in Asia.Caught
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Econ MPX- Global Economy
US Economy Key to Global Economy- Investment and Dollar Prove
Rahn 03 – Chairman for Global Economic Growth at the Cato Institute
[Richard, Cato: “How will the US Dollar Fail?” December 3, 2003, pg online @ (http://www.cato.org/pub_display.php?pub_id=2483)]
How far will the dollar fall, and should we care? We should be concerned, but if the administration, the Federal Reserve and the Congress act
responsibly, the dollar should be near its bottom and begin to rise against most foreign currencies.
The dollar has fallen sharply, about 30 percent, against the euro during this past year. At the moment, one has to pay about $1.24 for each
euro, while three years ago one only had to pay about 80 cents for a euro, but at the beginning of 1999 the euro cost about $1.15. The dollar has also
fallen in recent months against the British pound, the Japanese yen and many other currencies, but as much as it fell against
the euro.
These wide swings in currency values increase instability in the world economy by impeding international trade and investment because of rising
uncertainty. Some applaud the dollar's fall because they believe it makes U.S. exports less expensive and that higher demand will cut the trade deficit. The
downside of a low-value dollar is that it makes all the imports we consume more expensive, including raw material and parts
used by U.S. businesses, and makes it costlier for U.S. dollar holders to travel or invest outside the U.S. A continued drop in
the dollar's value could destabilize the international economy, leading to a worldwide recession.
Some argue our large trade deficit (or current account deficit) is responsible for the fall in the dollar's value. They have it backward. It is the flow of foreign
investment dollars (the capital account) into the U.S. economy that drives the trade deficit. The U.S. economy's higher return on capital than Europe or Japan
for the last 20 years caused private foreign investors to buy U.S. stocks and bonds and other assets. In addition, foreign governments, particularly of
China, Japan and other Asian states, have steadily increased their purchases of U.S. dollars as reserve backing for their own
currencies.
The world now is actually on a two-currency standard -- the dollar and the euro. China in effect has fixed its currency to the
dollar for the last two decades, and the Japanese central bank only allows the yen to fluctuate within a limited range against
the dollar. In the fall 2003 issue of the International Economy, monetary economist Criton Zoakos noted: "Europe, Japan, China and the AsiaPacific region are all export-driven economies whose growth depends on U.S. markets. The U.S. economy depends for its
growth on internal, entrepreneurial high-tech ferment."
So long as the U.S. continues to offer a higher return on capital than its foreign competitors, both foreign banks' and private investors' demand for dollars
grow, and the current account deficit can be sustained.
The whole world has a vested interest in exchange-rate stability. The export-driven economies of Asia and Europe cannot afford for the
dollar to fall too much, both because their markets will dry up and the value of their dollar assets in their own currencies will
decline. It appears the dollar rose too high against the euro two years ago and now has fallen too low. The current drop in the dollar's value
owed primarily to a decline in private foreign investment, and not to a decline in foreign central bank demand for dollars. The
decline in private foreign demand for dollars was partially fueled by a belief the dollar had become too expensive -- a normal
market response.
However, the U.S.
government made a series of mistakes that have discouraged foreign investors . America now is viewed as
unfriendly to foreign investors. Certain provisions of the Patriot Act and the Sarbanes-Oxley Act produce excessive and costly paperwork and
unnecessary privacy intrusions. The president's tax bill reduced the tax on capital for U.S. taxpayers, but kept very high withholding rates on dividends for
foreign investors, making them pay relatively more for helping our economy.
The Treasury Department also has not withdrawn the proposed, destructive foreign interest-reporting requirement, opposed
by nearly all economists, even the administration's.
To grow, the world economy needs reasonable currency stability. That will return when the U.S. government reaffirms belief in
a strong dollar and stops driving away foreign investors by making it very costly and difficult for them to invest.
If our leaders fail to understand the problem is not "the trade deficit" but destructive taxation and regulation, they will be personally
responsible for the unnecessary suffering of millions of the worlds' people. The U.S. needs foreign investment to sustain its
economic growth, and foreign governments and private investors need a safe and stable haven, with reasonable rates of
return, for their savings.
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Collapse of US Currency Jeopardizes India, Russia, and China
Marketwatch 7-4-09
[Marketwatch: India said to question Dollar’s International Status” by Sam Mamudi. pg online @ (http://www.marketwatch.com/story/india-said-toquestion-dollars-status)]
NEW YORK (MarketWatch) -- A
senior official in the Indian government has joined the growing chorus questioning the U.S. dollar's
unofficial position as global reserve currency, according a report published Saturday.
Suresh Tendulkar, chairman of the Prime Minister's Economic Advisory Council, said he's urging India to diversify its foreignexchange reserves and hold fewer dollars, according to Bloomberg News.
Tendulkar said the fact that India holds so much of its reserves in dollars "is a problem for us," reported Bloomberg.
Tendulkar's comments come one week after the People's Bank of China's annual financial stability report repeated an earlier call by central bank chief Zhou Xiaochuan for the
development of a new super-sovereign currency that would largely take the place of the dollar. See related story.
In early June, an official at The Bank of Russia reportedly said it will cut the share of U.S. Treasurys in its foreign exchange reserves.
Alexei Ulyukayev, first deputy chairman of Russia's central bank, said the bank plans to reduce the amount of Treasurys and that Russia would switch some of its reserves into bonds
issued by the International Monetary Fund, according to reports. See story.
Also on Saturday, China Daily reported that former Chinese
Vice-Premier Zeng Peiyan in a speech in Beijing on Friday called for a new system to
ensure the stability of the major reserve currencies. Zeng is the head of China Center for International Economic Exchanges.
Under the existing reserve currency arrangements, there needs to be tighter controls because " your currency is likely to become my problem," said Zeng,
according to China Daily.
The rhetoric towards the dollar's international status comes as leaders of the world's leading economies ready to meet in Italy for the G8
Summit 2009, which will be held from July 8 to July 10. The heads of Canada, France, Germany, Italy, Japan, Russia, U.K. and U.S. will gather in L'Aquila, and discussions of ways to
improve international finance are on the agenda.
Representatives from China, India, Brazil, Mexico, South Africa and Egypt will also be present at the meeting.
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Dollar MPX- Chinese Econ
Collapse of US Dollar Collapses China’s Economy
Dorsch 7-7-09—Editor of the Global Money Trends Newsletter
[Market Oracle: “How long Can the US Dollar Defy the Law of Gravity?” by Gary Dorsch. Pg online @
(http://www.marketoracle.co.uk/Article11862.html)]
On March 24th, the
People’s Bank of China’s (PBoC) chief Zhou Xiaochuan, emphasized his worry over the inflationary risks from the Fed’s money
printing scheme, by proposing to replacing the US-dollar with the SDR currency, that is controlled by the IMF, as the new global reserve currency.
Suresh Tendulkar, an adviser to Indian Prime Minister Manmohan Singh, is urging New Delhi to diversify its $265-billion foreignexchange reserves and hold fewer US-dollars.
China’s holdings of US-Treasury debt have soared by $257-billion from a year ago, to $763-billion today, exceeding Japan’s holdings
of $686-billion. Increasingly, the functioning of the massively indebted American economy is dependent upon China’s willingness to
recycle much of its export earnings, (largely dependent on sales to the US-consumer), to provide loans to the US-government.
Yet, any precipitous move by Beijing to become a net seller of US-Treasury debt, runs the risk of igniting a US-dollar selling
panic, triggering massive losses in China’s own portfolio of Treasuries, and the collapse of its main export market, the U nited
States. India’s economic adviser Tendulkar says US-dollar holders face a “prisoner’s dilemma” in terms of managing their
bond holdings.
Recent saber-rattling by Beijing over Washington’s mis-management of its fiscal and monetary affairs, began to conjure-up fears
in the global bond market, that Beijing was discreetly selling-off some of its US-bond holdings. The benchmark Treasury’s 10-year yield, which influences the direction of
home mortgage rates, zoomed higher in the second quarter, briefly penetrating the psychological 4.00% area, up from 2.50% when the Fed began its mad experiment with “nuclear QE.”
The surge in yields caught the Fed and the US Treasury by complete surprise.
China is Highly Vulnerable to a Fall in Dollar Value
Ford 7-2-09 Peter, Staff Writer for Christian Science Monitor
[Christian Science Monitor: “Geithner Visit: Chinese economists skeptical of US Strength” by Peter Ford. Pg online @
(http://www.csmonitor.com/2009/0602/p06s01-woap.html)]
As China has amassed vast foreign-exchange earnings from its worldwide exports over the past decade, it has become America's
biggest creditor, holding $768 billion in Treasury bonds and almost as much again in other US dollar assets .
That makes China highly vulnerable to a fall in the dollar's value , which some experts say is likely if the Obama administration's
loose credit policy and ballooning deficit lead to inflation. Premier Wen Jiabao worried aloud last March about
the value of Chinese dollar investments.
Geithner worked hard here to convince Chinese leaders and analysts that "we are very committed to make sure that when recovery is
established, we go back to living within our means, that we bring our fiscal deficits down," as he told Chinese state TV on
Tuesday.
Geithner also said Tuesday that the US would "do everything that is necessary to try to make sure we're
sustaining confidence in US financial markets, not just in the United States but around the world."
The Treasury secretary's reassurances were not enough for Xu Xiaonian, a professor at the China-Europe International Business
School in Shanghai.
"Talk is cheap," he scoffs. "If the US really wants to convince China that Treasury bonds are a safe investment, we need to see
some credible measures," such as inflation-linked interest rates.
Chinese officials did not comment on Geithner's reassurances, but they echoed his insistence that Washington
and Beijing must work more closely together if they are to pull the world out of the current financial and
economic crisis.
"We should strengthen strategic mutual trust and deepen pragmatic cooperation," said Vice Premier Wang Qishan, Geithner's
counterpart at high-level talks planned for this summer in Washington. Those talks, he added, will "send a
message that China and the United States are cooperating substantively."
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Dollar MPX- Japanese Econ
Collapse of US Dollar May Cause Japanese Economic Crisis
Dorsch 7-7-09—Editor of the Global Money Trends Newsletter
[Market Oracle: “How long Can the US Dollar Defy the Law of Gravity?” by Gary Dorsch. Pg online @
(http://www.marketoracle.co.uk/Article11862.html)]
Japan does not disclose the currency breakdown of its $1-trillion of foreign reserves but most of its FX-stash is parked in USdollars. Tokyo doesn’t favor a change in the dollar’s status as the key currency, since it’s comfortable with a gentleman’s
arrangement with the US Treasury that allows it to manipulate the yen’s value. The Bank of Japan (BoJ) still commands
a
lot of respect as a tough currency manipulator, when its economic interests are threatened by speculators.
The BoJ’s reputation for hard nosed intervention was etched in stone during the 15-months ending March 31,
2004, when it sold 35-trillion yen ($327-billion) in the
currency market to support Nikkei-225 multinationals and exporters, and prevent the dollar from falling
below 100-yen. As a result, Japan’s FX-stash ballooned to a record $826-billion, with the US-dollars
acquired, recycled into US-Treasuries.
Japan is now facing the threat that deflation will become deeply entrenched in its economy, preventing a rebound from its worst
postwar recession. Japanese wholesale prices were -5.4% lower in May from a year earlier, the sharpest
decrease since 1971, reflecting the collapse of key commodities, in the second half of 2008. Deflation is a
vicious cycle, where companies start cutting prices to attract customers, as falling wages and the worsening
job outlook dampen spending.
The primary tool that Tokyo has at its disposal to fight deflation, is pressure on the Bank of Japan (BoJ) to print more yen, in order
to prevent the dollar from moving lower, and exerting more downward pressure on commodity prices, in yen terms. On March
18th, the BoJ increased its monthly purchases of government bonds (JGB’s) by a third to 1.8-trillion yen
($18.3-billion) from 1.4-trillion yen, in order to inflate the supply of its currency. The BoJ pegs interest rates
at 0.1-percent.
Japan’s export slump deepened in May, casting doubt on its ability to emerge from its worst postwar recession . Overall,
shipments abroad dropped 41% from a year earlier, while exports to the US and Europe fell by 45%, from a
year ago. Tackling two threats with one stone, the BoJ is trying to fend of deflation and weaker exports, by aiming to
establish an artificial floor under the US-dollar at 94-yen, through covert intervention, mainly through money printing operations .
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@zhar
Dollar MPX- Hurts US Econ
Collapse of US Dollar Hurts Trade, Employment, and Oil Prices
Griswold 06- director of the Center for Trade Policy Studies at the Cato Institute
The summit between U.S. and Chinese economic officials in Beijing
last week
has been widely declared a disappointment, if not an
especially on the value of China's
outright failure. U.S. Treasury Secretary Henry Paulson and other senior officials were under pressure to deliver a dramatic breakthrough,
currency against the U.S. dollar,
and they didn't. The lack of visible progress, however, may not be such bad news after all.
Policy-makers in Washington believe a stronger yuan and a weaker dollar are just the tonic we need to spur manufacturing and job growth. In the past year, many U.S. manufacturers and
trade watchers have cheered as the dollar has depreciated 7 percent against a basket of major foreign currencies, and a whopping 27 percent since March 2002.
But a weaker dollar comes at the expense of millions of American consumers and a broad swath of U.S. industry. For consumers,
a weaker dollar means higher prices than they would otherwise pay for imported food, shoes and clothing, toys, sporting goods,
consumer electronics, medicines and cars. For Americans traveling abroad, a weaker dollar means more expensive vacations and
business trips.
American producers and their workers will also feel the pinch of a depreciated dollar. Half of the goods we import each year are
raw materials, capital machinery and parts, industrial supplies and other intermediate inputs purchased by U.S. companies.
(Think crude oil, sugar, steel, computers, memory chips, power generators and auto parts.) Rising import prices
for those goods mean higher costs for American producers, lower profits, and fewer jobs created in those sectors. For exporters,
higher import costs can partially offset competitiveness gains from a weaker dollar .
In fact, a falling dollar is one of the chief culprits behind rising crude oil prices. As the dollar loses its value against other
currencies, foreign oil producers can demand more dollars for a barrel of crude. This explains why a sharply depreciating dollar
has preceded every major spike in oil prices since the early 1970s.
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EMORY
@zhar
I/L- Investors k2 US Econ
Foreign investors key to US Economy
Dorsch 7-07-09 Editor of Global Money Trends
(Gary Dorsch, “How Long Can the US Dollar Defy the Law of Gravity”, The Market Oracle, 07-07-09, pg online @
http://www.marketoracle.co.uk/Article11862.html)
China’s holdings of US-Treasury debt have soared by $257-billion from a year ago, to $763-billion today, exceeding Japan’s holdings of
$686-billion. Increasingly, the functioning of the massively indebted American economy is dependent upon China’s willingness to
recycle much of its export earnings, (largely dependent on sales to the US-consumer), to provide loans to the US-government.
Yet, any precipitous move by Beijing to become a net seller of US-Treasury debt, runs the risk of igniting a US-dollar selling
panic, triggering massive losses in China’s own portfolio of Treasuries, and the collapse of its main export market, the United
States. India’s economic adviser Tendulkar says US-dollar holders face a “prisoner’s dilemma” in terms of
managing their bond holdings.
Recent saber-rattling by Beijing over Washington’s mis-management of its fiscal and monetary affairs, began to conjure-up fears in the global
bond market, that Beijing was discreetly selling-off some of its US-bond holdings. The benchmark Treasury’s 10-year yield, which influences the
direction of home mortgage rates, zoomed higher in the second quarter, briefly penetrating the psychological 4.00% area, up from 2.50% when the Fed began its mad experiment with
“nuclear QE.” The surge in yields caught the Fed and the US Treasury by complete surprise.
Selling hysteria in the Treasury bond market reached a fever pitch on May 27th, when Dallas Fed chief Richard Fisher, told the Wall Street Journal, “senior officials of the Chinese
government grilled me about a hundred times, on whether we are going to monetize the actions of our legislature. I was asked at every single meeting about our purchases of Treasuries.
That seemed to be the principal preoccupation of those that invested their surpluses in the United States,” he said.
With the Treasury’s 10-year yield bumping against the 4.00%-level, the US Treasury chief Timothy Geithner began a two-day visit to Beijing, amid speculation that China might scale
back its purchases of US Treasury notes. Geithner’s main objective was reassure top-Chinese officials that the Obama team will safeguard Beijing’s holdings of US-debt by bringing down
the federal budget deficit and phasing out the Fed’s policy of flooding the financial markets with US-dollars.
The next-day, on June 2nd, Fed chief Benjamin Bernanke, boxed into a tight corner by Beijing’s saber rattling, warned the US-Congress
that there is a limit to how many
US-dollars the central bank can print. “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we
will have neither financial stability nor healthy economic growth,” Bernanke warned US-lawmakers.“Maintaining the confidence of the
financial markets requires that we begin planning now for the restoration of fiscal balance. Either cuts in spending or increases in
taxes will be necessary to stabilize the fiscal situation. The Fed will not monetize the debt !” Bernanke’s pledge to stop the printing presses after
August was a grand omission of Washington’s subservience to its paymasters in Beijing.
After Bernanke signaled the outer limits of the Fed’s experimentation with “nuclear QE”, the Treasury bond vigilantes loosened their vice-grip, and yields on the 10-year note tumbled by
50-basis points over the next four-weeks to 3.50-percent. On June 16th, Fed governor Kevin Warsh backed-up the Fed chief, declaring, “ we
will not compromise price
stability buy monetizing large US budget deficits,” explaining that “financial markets may extract penalty pricing, if fiscal
authorities are unable to demonstrate a credible return to sustainable budgets.”
Sure enough, on June 24th, the Fed held to its pledge to limit its purchases to $1.45-trillion in mortgage-related debt by year-end, and $300-billion in Treasury notes by the end of August.
Beijing taught the Fed learned a valuable lesson, - trying to peg long-term interest rates at artificially low levels, through massive
money printing, can backfire, by igniting inflation fears and sending yields sharply higher .
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@zhar
I/L- Dollar K2 Investor Confidence
Dollar Influences Investors
Associated Press 7-15-09
[Associated Press: “Dollar Drops as Earnings Cheer Investors”, july 15, 2009. Pg online @
(http://news.moneycentral.msn.com/ticker/article.aspx?symbol=US:GS&feed=AP&date=20090715&id=9823131)]
A raft of positive U.S. economic data and better-than-expected corporate financial results drove the dollar sharply
lower Wednesday, but the buck still rose against the safe-haven yen.
Bullish news out of the U.S. tends to weigh on the dollar. It boosts investors' desire to make riskier investments, leading them
to funnel money out of cash and government debt and into emerging markets and stocks .
NEW YORK (AP) -
In late trading Wednesday, the euro rose to $1.4127 from $1.3936 late Tuesday, while the British pound steamed up to $1.6423 from $1.6280.
The dollar rose to 94.39 Japanese yen from 93.28 yen late Tuesday.
The yen tends to be the ultimate "safe-haven" beneficiary, and drops in value when investors opt for risk .
The dollar "appears to be out of favor this week," said Bank of New York Mellon senior currency strategist Michael
Woolfolk, due to positive U.S. data and corporate earnings. "With institutional investors selling (dollars) on lower risk
aversion and BRIC sovereigns selling (dollars) on reserve diversification, the near-term outlook is negative for the beleaguered
greenback," he said in a note to investors.
The "BRIC" group of nations — Brazil, Russia, India and China — in recent months have been talking up reserve asset
alternatives to the dollar as their Treasury-dominated holdings drop in value.
Late on Tuesday, chip giant Intel Corp. reported second-quarter sales that beat Wall Street analysts' estimates, and its third-quarter sales outlook of $8.5 billion also topped expectations.
That followed market-cheering results from Goldman Sachs Group Inc. and Johnson & Johnson Inc. earlier
in the day.
Meanwhile, the Labor Department on Wednesday said that consumer prices rose 0.7 percent in June, the
biggest increase in 11 months. Many investors have been worried about deflation as banks curb lending and
businesses keep a tight lid on wages.
However, investors have also been edgy about inflation once the economy starts to recover, which could eat
away at the dollar's value. The Federal Reserve, in minutes released Wednesday from its June meeting, opted not to expand its $1.2
trillion program of pumping money into the economy, fearing the move might exacerbate investors' worries
about rising prices.
In the minutes, the Fed also boosted its expectations for economic output through 2010.
The Fed also said Wednesday that industrial production fell 0.4 percent in June, a more moderate decline in the manufacturing sector than May's 1.4 percent drop.
In other trading, the dollar fell to 1.0733 Swiss francs from 1.0924 francs late Tuesday, and slid to 1.1126 Canadian dollars from 1.1360. The greenback was also sharply lower against the
Mexican peso, Brazilian real, and New Zealand and Australian dollars.
Dollar Fluctuations Influence Investor Confidence
Shriber 09 Financial Journalist For Bloomberg
[Todd, “Play Foreign Currencies against the US Dollar- And Win” 2009. Pg online @ (http://investopedia.com/printable.asp?a=/articles/forex/09/usddecline-hedging.asp)]
For decades, if not longer,
the U.S. dollar has been known as the world's reserve currency. Foreign investors and central banks have
gobbled up greenbacks and debt issued by the U.S. government on the premise that the dollar is the world's dominant currency and
American economic strength will bolster returns on dollar-denominated investments.
While the conventional wisdom regarding dollar strength has proved to be true over the years, it is important that investors remember that currencies act just
like stocks or other financial instruments. They enjoy runs of success and suffer through periods of doldrums. And while the dollar has been a highly desired currency for
the international investing community, it experiences periods of decline.
A fall in the dollar isn't cause for panic, though. Savvy investors can exploit the mighty greenback's decline when it happens and profit from it. Best of all, the avenues to profit from a
dollar drop continue to increase.
Where to Turn When the Dollar Tumbles
There are generally a few key warning signs that indicate a decline in the dollar is on the horizon. A consistent pattern of key
interest rate cuts by the Federal Reserve, a surge in the national debt and rising commodity prices, especially among gold and oil,
can all help investors identify potential peril for the dollar .
And when the dollar falls, that likely means other key currencies are rising, because investors are flocking to perceived quality.
For example, a tumble in the dollar combined with rising exports and economic growth in Japan would lead investors to the
Japanese yen. On the other hand, if U.S. economic growth is stagnant, but Europe and the U.K. are performing well, the euro
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and British pound become safe havens for currency investors .
EMORY
@zhar
(For more insight, read Top 8 Most Tradable
Currencies.)
Another avenue to consider is the Swiss franc. While Switzerland is in Europe, the country doesn't participate in the common currency and likely never will. In addition, the Swiss
government and central bank take almost painstaking efforts to keep the franc strong relative to competing currencies. As such, in 2009 the franc ranked as the world's fifth most-traded
currency behind the U.S. dollar, euro, pound and yen. (For more, see What are the most common currency pairs traded in the forex market?)
Watching the Dollar? Watch Commodities, Too
Because many commodities are denominated in dollars, meaning their quoted price is in dollars, investors should watch certain
commodity markets to get a sense of where the dollar is headed . For example, rising oil prices have generally resulted in dollar weakness because the dollar's
purchasing power suffers and consumers get less gas for their cars and heating oil for their homes when crude oil prices rise.
To hedge against the dollar's fall when commodities are in a bull market, look toward commodity-based currencies such as the Australian and Canadian dollars. When precious metals,
such as gold, are in high demand, the Australian dollar often benefits. Likewise, Canada's dollar rises when demand for crude oil surges. Another more recent play on a commodity
currency is the Brazilian real. Formerly an emerging market, in 2009 Brazil stands as the 10th largest economy in the world and is rich with natural resources, particularly oil. (For more,
see Commodity Prices And Currency Movements.)
Plenty of Options to Profit From the Dollar Decline
Trading in the foreign currency markets can be daunting as the daily dollar volume in these markets dwarfs that of U.S. equity
markets. Investors need to be aware that playing in FX markets is not for the faint of heart and they can lose more than their initial
investment. For many, the best choice is to leave this arena to the professionals and seek out other methods for profiting from a fall in the dollar.
Fortunately, there is no shortage of products to help investors do this. One is the U.S. Dollar Index, which tracks the dollar against a basket of foreign currencies. It is updated 24 hours a
day, seven days a week and trades on the New York Board of Trade. There is also a plethora of mutual funds that track foreign bonds or short the dollar against the other currencies. These
funds give investors the international exposure their portfolios need without the headache of directly tracking wild intraday swings in the currency markets. (For more insight, see Taking
Advantage Of A Weak U.S. Dollar.)
Equities, both international and domestic, provide another area for investors to profit from a dollar slide. If the forecast appears grim for U.S. equity markets, certain foreign markets may
be poised to benefit. Of course, there are U.S. stocks that can benefit from a fall in the dollar, too. Large multinational firms that count on overseas markets for a fair amount of their
profits benefit when the dollar is weak as they convert a British pound or Japanese yen back into a greater amount of U.S. dollars. Names like Procter & Gamble (NYSE:PG), General
Electric (NYSE:GE) and PepsiCo (NYSE:PEP) come to mind. (For further reading, see Currency Moves Highlight Equity Opportunities)
Conclusion
Investors need not suffer at the hands of a weak dollar. The methods to protect one's dollar-based investments are plenty and
effective hedging can serve as more than just protection: it can boost a portfolio's bottom line. In addition , the global economy
means there are global opportunities to help investors sleep a little easier when the dollar drops.
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@zhar
A2: G8 Summit- Change $
US Currency Will Remain Popular Despite the G8 Summit- Countries need to Discuss the World Economy,
Agriculture Reform
Reuters 7-03-09
[Reuters Tokyo: “Major nations should back U.S. dollar as key currency: Japan” July 3, 2009. Pg online @ (http://www.theglobeandmail.com/report-onbusiness/crash-and-recovery/major-nations-should-back-us-dollar-as-key-currency-japan/article1205386/)]
Major countries should support the dollar as the key international currency, although emerging nations may discuss a new global
reserve currency on the sidelines of the G8 summit next week, a Japanese official said on Friday.
China has asked for debate on a new global reserve currency when leaders from the Group of Eight meet with the G5 emerging
economies next week in Italy, G8 sources told Reuters. News of the Chinese request pushed the dollar down to a
three-week low on Wednesday.
But Japan thinks it would be difficult for another currency to replace the dollar as the world's global reserve currency and it is
against any move that would unnecessarily weaken the status of the dollar , said Yoichi Suzuki, director-general of the
Japanese foreign ministry's economic affairs bureau.
“Japan's stance is that major countries should support the dollar,” Mr. Suzuki, one of the country's main coordinators for the G8
summit, told Reuters in an interview.
“It won't benefit any country to talk about ideas for a new global key currency, which would weaken the dollar ,” he said.
Japan is interested in a stable dollar for its trade with other countries and because most of its massive foreign reserves are in dollar
assets.
Mr. Suzuki said he would not be surprised if the G5 discussed the role of the dollar as the key international currency when they
meet among themselves on the sidelines of the G8 summit in l'Aquila, Italy.
On Thursday, Chinese Deputy Foreign Minister He Yafei said it would be “normal” if diversification of the
currency system was discussed at next week's summit.
But Mr. Suzuki played down the idea, saying Tokyo does not expect the topic to be discussed at the meeting of G8 plus
G5 emerging nations, including China, Brazil and India .
Talks at the July 8-10 summit are expected to focus on the state of the world economy, financial regulation, climate change and
trade and development.
Tokyo will propose establishing principles and citing best practice to promote responsible investment in agriculture to cope with
farmland acquisition or “land grabs” in developing countries, Mr. Suzuki said.
“Agriculture investment in developing countries should not be done because of trying to avoid tough environmental standards in
industrial nations,” Mr. Suzuki said, noting that Japan has been getting support for this initiative from G8 counterparts.
By taking the lead on this proposal, Japan – the world's largest net food importer – also hopes to gain support from farming
that may have been hurt by irresponsible investment by foreign countries and companies , for Japanese firms' overseas
investment in agriculture , he said.
On a call by French President Nicolas Sarkozy for the G8 to discuss regulating oil prices to prevent the wild
swings of recent years, Mr. Suzuki said G8 officials have not been discussing it for the summit's agenda.
“Realistically, it would be hard to maintain oil prices at certain levels by intervening in the market. Japan thinks the most
important thing would be to boost transparency of the market to avoid speculative moves ,” he said.
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@zhar
AFF A/T: Dollar  Japanese Econ
Japan’s Dollar Stable Now
Dorsch 7-7-09—Editor of the Global Money Trends Newsletter
[Market Oracle: “How long Can the US Dollar Defy the Law of Gravity?” by Gary Dorsch. Pg online @
(http://www.marketoracle.co.uk/Article11862.html)]
Ironically, the yen has become a so-called safe haven currency, during times of strife in the global banking sector . While
European and US-banks are writing down more than $1-trillion in subprime losses, Japanese banks have been surprisingly
stable. Japanese banks, hammered by the collapse of a real estate bubble in the early 1990’s, haven’t reported gigantic losses
related to the collapse of the American real estate bubble since its peak in August 2006.
Instead, Japan’s megabanks, - Mitsubishi UFJ Financial, Mizuho Financial, and Sumitomo Mitsui Financial,
have admitted to only $5-billion of sub-prime losses so far. “The maximum losses of Japanese financial institutions are
1-trillion yen ($9.4 billion), not big enough for the government to act,” said Kaoru Yosano, former chairman of the ruling Liberal
Democratic Party’s fiscal reform panel.
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@zhar
AFF A/T: Chinese Economy
No Impact- China is switching to the Yuan Now
Bloomberg 7-8-09
[BloombergNews: “Yuan deposes Dollar on China’s Border In Sign of Future” pg online @
(http://www.bloomberg.com/apps/news?pid=20601080&sid=aqA9QhRSNeqM)]
Huang Xinyuan, who sells mining equipment and pesticides to customers across China’s border with Vietnam,
says he no longer wants payment in U.S. dollars
and prefers the yuan.
Sales using the greenback at Guangxi Jinbei Group, where Huang is vice president, dropped to 30 percent of contracts in 2008 from 87 percent in 2007. The
yuan, which has
gained 21 percent since it was allowed to strengthen against the dollar starting in 2005, offers greater stability, he said.
“In recent years, the dollar has gone in only one direction and that is down ,” said Huang, 45, in his second- floor office in Pingxiang, a town set amongst
karst limestone hills and sugar-cane fields in China’s southwest Guangxi Zhuang Autonomous Region, three kilometers (1.9 miles) from Vietnam. “ Settling our orders in yuan
removes a major risk.”
China expanded yuan settlement agreements last week from border zones to its largest financial centers , including Shanghai,
Guangzhou and Hong Kong. The program is being rolled out across Malaysia, Indonesia, Brazil and Russia, all nations
seeking to reduce the dollar’s role as the linchpin of world finance and trade.
The central bank first brought up the concept of a supranational currency to replace the greenback in reserves in March. It will sponsor use of the yuan in trade by arranging export tax
rebates. Russia and India said the global financial crisis had highlighted the dollar’s flaws and called for a debate before the Group of Eight leaders meet in L’Aquila, Italy, starting today.
‘Raise Questions’
“It does give you an idea of what the future could look like,” said Ben Simpfendorfer, chief China economist in Hong Kong at Royal Bank of Scotland Group Plc, the fifth-biggest
foreign-exchange trader. “The
Chinese see an opportunity at this point to raise questions about the dollar and its status as a reserve
currency.”
China, the biggest overseas holder of U.S. Treasuries, trimmed its holdings of government notes and bonds by $4.4 billion to
$763.5 billion in April. Premier Wen Jiabao said in March that he was “worried” the dollar would weaken as U.S. President
Barack Obama sells record amounts of debt to fund his $787 billion economic stimulus plan .
“The objective is to develop a substitute for the dollar as the world’s reserve currency,” said Tim Condon, Singapore- based head of Asia research at
ING Groep NV, part of the largest Dutch financial-services group. “That will reduce the ability of the U.S. government to finance deficits with
impunity.”
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@zhar
AFF A/T: Countries Abandoning Dollar
Countries will not Replace the Dollar Despite their Proposals
Miller 3-26-09 -- Director, Center for International Trade and Economics at The Heritage Foundation
[Terry, The Heritage Foundation: “New Global Currency Proposal: Good Diplomatic Theater but Bad Policy” pg online @
(http://www.heritage.org/Research/tradeandeconomicfreedom/wm2364.cfm)]
Recently, both China and Russia have called for the replacement of the dollar as the international reserve currency of choice,
suggesting use of IMF Special Drawing Rights (SDRs) instead. Don't rush to sell your greenbacks, however:
The proposal has far more to do with the theater of international diplomacy than the workings of the world economy.
Even as he made the proposal, Chinese central banker Zhou Xiaochun acknowledged that it would require "extraordinary
political vision and courage." That is diplomatic speak for "We know this is impossible ." The fact that Zhou and his
Russian counterpart in proposing the idea, Finance Minister Alexei Kudrin, placed the timeline for the change far in the
future--30 years in the case of Kudrin--offers an additional strong clue that the proposal is politically
motivated rather than intended to address a real and pressing economic problem.
For both Zhou and Kudrin, an attack on the dollar just before the G-20 economic summit is a great theatrical device with
which to express displeasure at U.S. dominance of the international financial system. It is also a marker of their
unhappiness with the ineffective U.S. approach to restoring world growth and protecting international trade
and financial flows, sending a clear signal that they have no intention of rubber-stamping U.S. proposals at the summit.
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@zhar
AFF A/T: Dollar Key to Global Econ
Weak Dollar is Key To Global Economy
WSJ 5-22-09
[Wall Street Journal: “Dollar Loses Haven Flair as Investors Grow Bold” by Alex Frangos. Pg online @
(http://online.wsj.com/article/SB124289873815142839.html)]
The dollar is in retreat.
Even with Thursday's market drops, many investors who hoarded the dollar during the recent turmoil are shifting into
riskier assets, in particular currencies of big commodities exporters that would benefit from global growth .
The dollar has lost ground against the euro -- tumbling to a 4½-month low Thursday -- and has been beaten up even more relative to commodity based currencies such as the Canadian
dollar and Brazilian real. Investors
chasing the first glimmers of expansion are pulling dollars out of their mattresses and sending them to
riskier locales, driving up currencies there. They also are worried that the coming wave of federal debt issuance will depress the dollar.
In New York on Thursday, one euro bought $1.3905, above March's $1.2534. Even a jolt to the British pound in
the form of a Standard & Poor's ratings warning Thursday only briefly dented the dollar's downward direction. The dollar gained
on the news, but after a few hours the pound bounced back over its prior day's level . One pound bought $1.5856 from
$1.5754 Wednesday.
Investors poured into dollars during the financial crisis, betting that it was the world's safest currency,
thwarting predictions that the Federal Reserve's easing policies would weaken the dollar. Low interest rates
in Europe and elsewhere also gave less incentive to leave the dollar.
[Even with Thursday's bout of risk-aversion, the dollar has suffered as investors grow bolder. Above, currency rates on a board in Tokyo this week.] Reuters
Even with Thursday's bout of risk-aversion, the dollar has suffered as investors grow bolder. Above, currency rates on a board in Tokyo this week.
He expects the U.S. to be among the last to
raise interest rates and is betting the dollar will continue to weaken. "The market will be risk-seeking, so all the money that was repatriated into the U.S. will
"Now we are getting a reversal of all those things," says Parker King, head of currency investing at Putnam Investments.
be put back to work outside the U.S." He also notes rising oil prices is "dollar-negative," because it contributes to the U.S. trade imbalance.
Adding to the dollar-bear view Thursday was concern about big tranches of Treasurys hitting the market soon and the prospect of the U.S.'s own triple-A rating taking a hit. The Fed's
release of minutes Wednesday showing that it mightn't be done pumping money into the economy also affected the dollar.
Many currency analysts forecast a further dollar slide. Deutsche Bank expects the euro to strengthen to $1.50 over the summer. Standard Bank is looking for a move to $1.55 within a
year. J.P. Morgan Chase has revised its dollar forecasts lower, predicting $1.45 by December, from its previous expectations of $1.34. Japanese bank Nomura said it thinks the
unconventional easing policy in the U.S. will spark a euro surge to $1.50 by year's end.
Over the long term, a weak dollar makes U.S. exporters more competitive and could aid in a recovery. Short-term fluctuations
are less important. "At the margin, it could help exports," says Richard Berner, an economist at Morgan Stanley. But
he says much more important for export growth would be a general return of global demand. "The sensitivity of exports to
growth is multiples compared to changes in currency."
On the other side of the dollar's slide is a big boost in currencies tied to oil and metals. The Canadian dollar has recovered nearly half the value it lost following the collapse of Lehman
Brothers last September. One Canadian dollar Thursday bought $0.8785, compared to a November 2008 low of $0.7768.
[down, dollar, down]
A Goldman Sachs research note Thursday figures that Australia, a major ore producer, and Canada will see their currencies gain strength because they are "among the first advanced
economies to return to trend growth." Both those countries have avoided fiscal deficits and have stronger banking systems compared to the U.S. and the U.K.
To be sure, a bet on the dollar's weakness is a bet on the global economy recovering. The opposite could also hold true. Despite the dollars recent
swoon, Banc of America-Merrill Lynch foreign-exchange strategist Daniel Tenengauzer reiterated his contrarian view Thursday that the dollar will strengthen in coming months. That
is despite chatter, especially among Chinese and Russian officials, that the dollar's status as the world's reserve currency is no
longer assured.
Mr. Tenengauzer says long-term changes in U.S. consumer spending and savings rates will keep U.S. trade deficits low, which produces dollar
strength. He anticipates the euro will weaken to $1.20 in the third quarter of 2009. "It's about an unwinding of an entire layer of consumption that evolved
around a more indebted consumer," he says.
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