Thursday, October 11, 2007
How to prevent a rout of the declining dollar
By Jeffrey Garten
Published: October 10 2007 19:53 | Last updated: October 10 2007 19:53
When Hank Paulson, US Treasury secretary, says the US believes in a strong dollar, he is merely repeating an empty mantra, for the Bush administration continues to rely almost entirely on an ever weakening dollar as the central thrust of its international economic policy.
When a European leader such as Jean-Claude Juncker, chairman of the group of 13 eurozone ministers, publicly demands discussions of the soaring euro at the upcoming Group of Seven industrial nations meeting in Washington, he is just venting his frustration, for it has been decades since the G7 accomplished anything on currency misalignments.
The fact is, words hardly matter in today’s gigantic marketplace. Only action does.
Leaders are behaving like deer caught in the headlights. Yet some action is crucial now because the dollar’s orderly retreat could at any time change into a chaotic rout, given the uncertainties and anxieties in today’s markets. The danger is enhanced as every sign – financial, economic and political – points to a dollar that will continue to drop, making a bet on a weaker dollar nearly a risk-free proposition.
Moreover, while the Bush administration exalts the export stimulus from a weakening dollar, the overall effect of continuous devaluation will be highly detrimental to America. It will be inflationary, because it will raise the price of imports, including oil and other commodities. At a time when the US needs to borrow $2bn (€1.4m) (£979m) a day to finance its current account deficits, a depreciating dollar will act as a disincentive to foreign investment in US government securities unless American interest rates are raised. A weakened greenback will also expose US industries to foreign takeovers at bargain basement prices. Admittedly, conflicting interests among countries make any grand scheme, such as the Plaza Accord that realigned and stabilised currencies in 1985, a non-starter. There are, however, at least four moves that finance ministers and central bankers should make soon.
At an opportune moment, they could make a sharp and powerful co-ordinated intervention in the currency markets to buy dollars. This surprise move would not change long-term trends, but it would show speculators that shorting the dollar is not always without consequence. The intervention could therefore bolster prospects for an orderly dollar decline and demonstrate that the US and the European Union are capable of jointly using powerful policy levers.
Next, the US could temporarily turn off its relentless pressure on Beijing to revalue the renminbi (and thereby further weaken the dollar). Over the long term, a floating Chinese currency is important, but for now a stronger renminbi adds petrol to a raging fire. Instead, discussions with the Middle Kingdom need to focus on something else: what stabilising role should China play if there were a major currency crisis?
Third, the US needs to be prepared for a large increase in foreign acquisitions. While protectionism would be a disaster, allowing many of the new, cash-laden foreign government investors in the Persian Gulf and Asia to use America as a bargain basement would itself result in a nasty nationalistic reaction. US Treasury officials should be confidentially talking now to the big sovereign wealth funds to develop a mutual understanding of some US rules concerning transparency, maximum ownership percentages and sectoral sensitivities. The aim: to facilitate investment in a highly charged political environment.
None of these measures deals with important longer-term questions. That is why the Bank for International Settlements ought quietly to undertake a thorough examination of the future of the dollar in the international economy. With the growing power of the euro, the escalating importance of London as a global financial centre, the inevitability of the renminbi becoming a big global currency and the long-term deficits and foreign debts America faces in financing a burgeoning social safety net and massive military burdens, it is unlikely that the dollar will remain as central to global commerce as it has been for more than half a century. It is too late for the lame-duck Bush team to care about this, but in 2009 a new US administration – not to mention the rest of the world – should have great interest in the results of this project.
The writer is the Juan Trippe professor of international trade and finance at the Yale School of Management
Copyright The Financial Times Limited 2007
Published: October 10 2007 19:53 | Last updated: October 10 2007 19:53
When Hank Paulson, US Treasury secretary, says the US believes in a strong dollar, he is merely repeating an empty mantra, for the Bush administration continues to rely almost entirely on an ever weakening dollar as the central thrust of its international economic policy.
When a European leader such as Jean-Claude Juncker, chairman of the group of 13 eurozone ministers, publicly demands discussions of the soaring euro at the upcoming Group of Seven industrial nations meeting in Washington, he is just venting his frustration, for it has been decades since the G7 accomplished anything on currency misalignments.
The fact is, words hardly matter in today’s gigantic marketplace. Only action does.
Leaders are behaving like deer caught in the headlights. Yet some action is crucial now because the dollar’s orderly retreat could at any time change into a chaotic rout, given the uncertainties and anxieties in today’s markets. The danger is enhanced as every sign – financial, economic and political – points to a dollar that will continue to drop, making a bet on a weaker dollar nearly a risk-free proposition.
Moreover, while the Bush administration exalts the export stimulus from a weakening dollar, the overall effect of continuous devaluation will be highly detrimental to America. It will be inflationary, because it will raise the price of imports, including oil and other commodities. At a time when the US needs to borrow $2bn (€1.4m) (£979m) a day to finance its current account deficits, a depreciating dollar will act as a disincentive to foreign investment in US government securities unless American interest rates are raised. A weakened greenback will also expose US industries to foreign takeovers at bargain basement prices. Admittedly, conflicting interests among countries make any grand scheme, such as the Plaza Accord that realigned and stabilised currencies in 1985, a non-starter. There are, however, at least four moves that finance ministers and central bankers should make soon.
At an opportune moment, they could make a sharp and powerful co-ordinated intervention in the currency markets to buy dollars. This surprise move would not change long-term trends, but it would show speculators that shorting the dollar is not always without consequence. The intervention could therefore bolster prospects for an orderly dollar decline and demonstrate that the US and the European Union are capable of jointly using powerful policy levers.
Next, the US could temporarily turn off its relentless pressure on Beijing to revalue the renminbi (and thereby further weaken the dollar). Over the long term, a floating Chinese currency is important, but for now a stronger renminbi adds petrol to a raging fire. Instead, discussions with the Middle Kingdom need to focus on something else: what stabilising role should China play if there were a major currency crisis?
Third, the US needs to be prepared for a large increase in foreign acquisitions. While protectionism would be a disaster, allowing many of the new, cash-laden foreign government investors in the Persian Gulf and Asia to use America as a bargain basement would itself result in a nasty nationalistic reaction. US Treasury officials should be confidentially talking now to the big sovereign wealth funds to develop a mutual understanding of some US rules concerning transparency, maximum ownership percentages and sectoral sensitivities. The aim: to facilitate investment in a highly charged political environment.
None of these measures deals with important longer-term questions. That is why the Bank for International Settlements ought quietly to undertake a thorough examination of the future of the dollar in the international economy. With the growing power of the euro, the escalating importance of London as a global financial centre, the inevitability of the renminbi becoming a big global currency and the long-term deficits and foreign debts America faces in financing a burgeoning social safety net and massive military burdens, it is unlikely that the dollar will remain as central to global commerce as it has been for more than half a century. It is too late for the lame-duck Bush team to care about this, but in 2009 a new US administration – not to mention the rest of the world – should have great interest in the results of this project.
The writer is the Juan Trippe professor of international trade and finance at the Yale School of Management
Copyright The Financial Times Limited 2007
Dollar tumbles against euro on ECB rate speculation
NEW YORK (AFP) - The dollar tumbled heavily against the euro Thursday as speculation grew that the European Central Bank may lift its benchmark interest one more time between now and the end of the year.
The euro surged to 1.4195 dollars at 2100 GMT, up from 1.4145 dollars late Wednesday in New York.
The single European currency, however, had earlier jumped to 1.4240 dollars, just shy of its record 1.4283 struck on October 1.
Traders said the euro largely drew fuel from a series of hawkish comments by European Central Bank (ECB) officials.
ECB president Jean-Claude Trichet reiterated that economic growth in the eurozone remained robust and that inflation was subject to upside risks.
His comments sparked renewed speculation that the ECB could be gearing up to hike rates against expectations of lower interest rates in the United States, which have served to apply downward pressure on the dollar.
Speculators generally prefer to invest in countries or regions where interest rates are higher so they can reap better returns on their currency bets.
"The US dollar remains quite weak as the currency markets remain full of dollar bears," Rob Giannone, a PNC currency analyst, said in a briefing note.
"The bulk of economic weakness and expectations for interest rate cuts are already priced into the dollar," he said.
The dollar meanwhile fetched 117.27 yen compared with 117.22 a day earlier and after the Bank of Japan opted to leave interest rates unchanged at 0.50 percent Thursday.
Japanese interest rates are the lowest among industrialized nations and have encouraged investors to borrow yen and invest the funds in other high-yielding currencies elsewhere. Sound Familar?
These transactions, known as carry trades, have weakened the yen, however.
"The risk appetite has rebounded and people are back to yen-funded carry trades," said Callum Henderson, head of currency strategy at Standard Chartered Bank in Singapore.
The dollar was unable to take advantage of two improved economic reports.
The Labor Department reported a fall in first-time claims for unemployment insurance last week to their lowest point in the third quarter, 308,000, down 12,000 from the prior week.
And the government said the US trade deficit narrowed more than expected in August to 57.6 billion dollars, marking its lowest reading in seven months as exports offset higher oil import prices.
In late New York trade, the dollar stood at 1.1819 Swiss francs from 1.1827 Wednesday.
The euro surged to 1.4195 dollars at 2100 GMT, up from 1.4145 dollars late Wednesday in New York.
The single European currency, however, had earlier jumped to 1.4240 dollars, just shy of its record 1.4283 struck on October 1.
Traders said the euro largely drew fuel from a series of hawkish comments by European Central Bank (ECB) officials.
ECB president Jean-Claude Trichet reiterated that economic growth in the eurozone remained robust and that inflation was subject to upside risks.
His comments sparked renewed speculation that the ECB could be gearing up to hike rates against expectations of lower interest rates in the United States, which have served to apply downward pressure on the dollar.
Speculators generally prefer to invest in countries or regions where interest rates are higher so they can reap better returns on their currency bets.
"The US dollar remains quite weak as the currency markets remain full of dollar bears," Rob Giannone, a PNC currency analyst, said in a briefing note.
"The bulk of economic weakness and expectations for interest rate cuts are already priced into the dollar," he said.
The dollar meanwhile fetched 117.27 yen compared with 117.22 a day earlier and after the Bank of Japan opted to leave interest rates unchanged at 0.50 percent Thursday.
Japanese interest rates are the lowest among industrialized nations and have encouraged investors to borrow yen and invest the funds in other high-yielding currencies elsewhere. Sound Familar?
These transactions, known as carry trades, have weakened the yen, however.
"The risk appetite has rebounded and people are back to yen-funded carry trades," said Callum Henderson, head of currency strategy at Standard Chartered Bank in Singapore.
The dollar was unable to take advantage of two improved economic reports.
The Labor Department reported a fall in first-time claims for unemployment insurance last week to their lowest point in the third quarter, 308,000, down 12,000 from the prior week.
And the government said the US trade deficit narrowed more than expected in August to 57.6 billion dollars, marking its lowest reading in seven months as exports offset higher oil import prices.
In late New York trade, the dollar stood at 1.1819 Swiss francs from 1.1827 Wednesday.
The FAT LADY sings at American Express
Lets see...
1) We have a reduction in spending of frivoless imported crap like trendy clothing because the house is no longer an ATM.
2) Increase output and exportation of real goods like trains planes and automobles.
3) Better than expected employment figures
4) Retailor like Walmart some how pull through this and raise earnings despite falling sales.
Wow!!! If the only current causalty since the last FED meeting are credit card companies who lives are based on frivoless consumption, should the rest of America be obligated to subsidise an industry where the employees all make multiple folds times the average American worker. Tax those with nothing and give it to the rich so the rich can be richer? AND YES A GUTTING OF THE INTRA-BANK RATE IS DESIGN TO DO THAAT BY INFLATING OUR COST OF SURVIVAL, INFLATING THE REAL COST OF BORROWING MONEY FOR CARS, HOUSES, AND OTHER GOODS ALL SO A BANKER CAN BORROW DIRECTLY FROM OUR GOVERNMENT AT A LOW RATE AND THEN LOAN THAT MONEY BACK TO ANOTHER GOVERNMENT LIKE CANADA OR GERMANY AT A HIGHER RATE. The money is not coming back to the people. We have proven that with the rise in long term rates over the past month that are going through the roof as the Treasury balance a budget that is fuck up with some help by the Federal Reserve and a President that believes if you deflate the dollar day after day year after year idiots will still want the dollar.
There is no FUCKING way in hell the rates are being cut again.
WASHINGTON (AP) -- The U.S. trade deficit fell to the lowest level in seven months, helped by record-high sales of American products and the declining value of the dollar. The deficit with China declined as imports edged down slightly following a string of high-profile recalls.
The Commerce Department reported Thursday that the deficit declined to $57.6 billion in August, down 2.4 percent from the July imbalance. It was lowest gap between exports and imports since January and a much better showing than had been expected.
The improvement reflected a 0.4 percent rise in exports, which climbed to a record $138.3 billion. Sales of farm products including wheat, soybeans and corn, and exports of industrial products such as chemicals and steel both hit record levels.
Imports actually dropped by 0.4 percent to $195.9 billion, reflecting lower shipments of foreign cars and furniture, which offset a big increase in the foreign oil bill, which rose to the highest level in a year.
In other economic news, the Labor Department said that the number of newly laid off workers filing claims for unemployment benefits fell by 12,000 last week to 308,000. That was a better showing than had been expected.
The nation's big chain retail stores reported disappointing results in September as lingering summer weather and the severe housing slump dampened consumers' desire to shop. The biggest losers included apparel sellers. Wal-Mart Stores Inc. reported a modest sales gain, but the increase was below analysts' expectations.
The politically sensitive trade deficit with China fell by 5.3 percent to $22.5 billion. U.S. exports were up, led by increased sales of aircraft and soybeans, while imports slipped a slight 0.7 percent. The decline in imports occurred after a series of recalls of tainted products from toys with lead paint to toothpaste and unsafe tires.
However, the small drop came in such areas as computers and furniture, where there have not been highly publicized recalls. Imports of toys from China actually rose as American retailers stocked their shelves for Christmas.
The boom in U.S. exports is helping to cushion the U.S. economy from the adverse effects of the housing bust and a severe credit crunch. Overseas demand for U.S. goods is being helped by a falling value of the dollar against many other currencies. That development pushes up the cost of foreign vacations and imports for American consumers but makes U.S. products cheaper in foreign markets.
Through the first eight months of this year, the trade deficit is running at an annual rate of $708 billion, down 6.7 percent from last year's imbalance of $758.5 billion, which had been the fifth consecutive record deficit.
President Bush's critics still contend that his trade policies have been harmful to the United States, resulting in record-high deficits for most of his time in office and contributing to the loss of 3 million manufacturing jobs since January 2000.
Trade critics have focused their unhappiness on China, where the deficit is on track to set another record, running at an annual rate of $246 billion. That would be the largest imbalance ever recorded for a single country.
Lawmakers are pushing a variety of bills that would punish China for what they see as unfair trade practices such as manipulating its currency to keep its value low against the dollar as a way of boosting Chinese imports and making it harder for American companies to sell their products in China.
The Bush administration, led by Treasury Secretary Henry Paulson, contends that such measures would be counterproductive, prompting China to retaliate against American goods. They argue that high-level diplomatic talks offer the best chance of resolving trade differences between the two nations.
For August, America's foreign oil bill rose by 0.8 percent to $27.5 billion, the highest level since last August. The average price for a barrel of imported crude oil jumped to a record high of $68.09. Analysts are predicting that figure will climb higher in coming months given that oil prices have recently hit all-time highs above $80 per barrel.
America's trade deficit with Mexico jumped 23.6 percent to a record of $6.9 billion while the deficit with Canada, the country's biggest trading partner, edged down 6.6 percent to $5.3 billion. The deficit with the European Union fell by 21.1 percent to $10.2 billion while the imbalance with Japan dropped 16 percent to $6.7 billion.
1) We have a reduction in spending of frivoless imported crap like trendy clothing because the house is no longer an ATM.
2) Increase output and exportation of real goods like trains planes and automobles.
3) Better than expected employment figures
4) Retailor like Walmart some how pull through this and raise earnings despite falling sales.
Wow!!! If the only current causalty since the last FED meeting are credit card companies who lives are based on frivoless consumption, should the rest of America be obligated to subsidise an industry where the employees all make multiple folds times the average American worker. Tax those with nothing and give it to the rich so the rich can be richer? AND YES A GUTTING OF THE INTRA-BANK RATE IS DESIGN TO DO THAAT BY INFLATING OUR COST OF SURVIVAL, INFLATING THE REAL COST OF BORROWING MONEY FOR CARS, HOUSES, AND OTHER GOODS ALL SO A BANKER CAN BORROW DIRECTLY FROM OUR GOVERNMENT AT A LOW RATE AND THEN LOAN THAT MONEY BACK TO ANOTHER GOVERNMENT LIKE CANADA OR GERMANY AT A HIGHER RATE. The money is not coming back to the people. We have proven that with the rise in long term rates over the past month that are going through the roof as the Treasury balance a budget that is fuck up with some help by the Federal Reserve and a President that believes if you deflate the dollar day after day year after year idiots will still want the dollar.
There is no FUCKING way in hell the rates are being cut again.
WASHINGTON (AP) -- The U.S. trade deficit fell to the lowest level in seven months, helped by record-high sales of American products and the declining value of the dollar. The deficit with China declined as imports edged down slightly following a string of high-profile recalls.
The Commerce Department reported Thursday that the deficit declined to $57.6 billion in August, down 2.4 percent from the July imbalance. It was lowest gap between exports and imports since January and a much better showing than had been expected.
The improvement reflected a 0.4 percent rise in exports, which climbed to a record $138.3 billion. Sales of farm products including wheat, soybeans and corn, and exports of industrial products such as chemicals and steel both hit record levels.
Imports actually dropped by 0.4 percent to $195.9 billion, reflecting lower shipments of foreign cars and furniture, which offset a big increase in the foreign oil bill, which rose to the highest level in a year.
In other economic news, the Labor Department said that the number of newly laid off workers filing claims for unemployment benefits fell by 12,000 last week to 308,000. That was a better showing than had been expected.
The nation's big chain retail stores reported disappointing results in September as lingering summer weather and the severe housing slump dampened consumers' desire to shop. The biggest losers included apparel sellers. Wal-Mart Stores Inc. reported a modest sales gain, but the increase was below analysts' expectations.
The politically sensitive trade deficit with China fell by 5.3 percent to $22.5 billion. U.S. exports were up, led by increased sales of aircraft and soybeans, while imports slipped a slight 0.7 percent. The decline in imports occurred after a series of recalls of tainted products from toys with lead paint to toothpaste and unsafe tires.
However, the small drop came in such areas as computers and furniture, where there have not been highly publicized recalls. Imports of toys from China actually rose as American retailers stocked their shelves for Christmas.
The boom in U.S. exports is helping to cushion the U.S. economy from the adverse effects of the housing bust and a severe credit crunch. Overseas demand for U.S. goods is being helped by a falling value of the dollar against many other currencies. That development pushes up the cost of foreign vacations and imports for American consumers but makes U.S. products cheaper in foreign markets.
Through the first eight months of this year, the trade deficit is running at an annual rate of $708 billion, down 6.7 percent from last year's imbalance of $758.5 billion, which had been the fifth consecutive record deficit.
President Bush's critics still contend that his trade policies have been harmful to the United States, resulting in record-high deficits for most of his time in office and contributing to the loss of 3 million manufacturing jobs since January 2000.
Trade critics have focused their unhappiness on China, where the deficit is on track to set another record, running at an annual rate of $246 billion. That would be the largest imbalance ever recorded for a single country.
Lawmakers are pushing a variety of bills that would punish China for what they see as unfair trade practices such as manipulating its currency to keep its value low against the dollar as a way of boosting Chinese imports and making it harder for American companies to sell their products in China.
The Bush administration, led by Treasury Secretary Henry Paulson, contends that such measures would be counterproductive, prompting China to retaliate against American goods. They argue that high-level diplomatic talks offer the best chance of resolving trade differences between the two nations.
For August, America's foreign oil bill rose by 0.8 percent to $27.5 billion, the highest level since last August. The average price for a barrel of imported crude oil jumped to a record high of $68.09. Analysts are predicting that figure will climb higher in coming months given that oil prices have recently hit all-time highs above $80 per barrel.
America's trade deficit with Mexico jumped 23.6 percent to a record of $6.9 billion while the deficit with Canada, the country's biggest trading partner, edged down 6.6 percent to $5.3 billion. The deficit with the European Union fell by 21.1 percent to $10.2 billion while the imbalance with Japan dropped 16 percent to $6.7 billion.
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