For the first time this year, U.S. Treasury Secretary Timothy Geithner has revived the verbal-support bandwagon for the dollar when he was asked on Monday whether the U.S. plans to devalue its currency to stimulate economic growth.
“That’s not going to happen in this country,” he said. “The administration will work hard to preserve confidence in the strong dollar. It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to be competitive … It is not a viable, feasible strategy and we will not engage in it.”
Yes, I believe the “strong dollar” statements are definitively back on the U.S. agenda.
Interestingly, European Central Bank President Jean-Claude Trichet said at a recent news conference in Frankfurt that he supports a “strong dollar” and opposes “disorderly” shifts in global exchange rates.
“I share the view of the U.S. authorities when they reiterate that a strong dollar is in the interest of the United States of America,” he said.
Besides that, the People's Bank of China (PBOC) unexpectedly raised their one-year lending (as well as their deposit) rates by 25 basis points each. Their one-year deposit rate stands at 2.5 percent while their one-year lending rate is at 5.56 percent.
This was the first such adjustment since December 2007.
Only a few days ago at the IMF/World Bank meetings in Washington, PBOC Governor Zhou Xiaochuan said “there isn't enough evidence to prove that the quantitative tools which we have used to mop up liquidity, including the reserve requirement and open market operations, are insufficient to keep inflation within target.”
In recent days, there have been rumors of a possible accord between the U.S. and China ahead of the G-20 meeting.
There is logic in this because such an accord is needed to keep financial markets from taking a turn for the worse.
Friday, the U.S. Treasury delayed the currency-manipulation report until after the congressional elections on Nov. 2 in order to take advantage of the G-20 summit in South Korea on Nov. 11 and the Asia-Pacific Economic Cooperation (APEC) forum of the 21 Pacific Rim countries a few days later.
Interestingly, in a recent interview with Bloomberg TV, Geithner sounded surprisingly positive about Chinese currency policy when he stated: “Since Sept. 2, the pace of appreciation (of the Chinese currency) has accelerated to a rate of more than 1 percent per month. If sustained over time, this would help correct what the IMF (International Monetary Fund) has concluded is a significantly undervalued currency."
To me, this sounded like a conscious attempt to establish the groundwork for not calling China a currency manipulator.
Any bilateral accord would certainly require the U.S. not to call China a currency manipulator — but what would China need to show in return?
To put this extremely complex subject a bit more simply, would not calling China a currency manipulator be a signal that China is prepared to allow the yuan to move at a faster pace?
One possible way of doing this could be for the PBOC to change its policy by demonstrating greater willingness to focus on tackling inflationary pressures and less on attempting to keep its currency “competitive.” Given that, a rate hike should (in addition to tackling inflation directly) make the Chinese currency rather more attractive, it could be argued that yesterday’s move was just such a signal.
There is also a “not so nice” read as to what China did yesterday: By hiking monetary policy rather than letting the currency rise, China is sending a strong message to the U.S. that what it has done so far about the dollar is simply not enough.
The move by the POBC seems clearly aimed at sending a strong message to the U.S.
In this context, the timing of this week’s comments by Geithner and the surprising policy shift of the PBOC at least permits us to speculate that some agreement has been reached between the U.S. and China.
It’s certainly not a coincidence that the timing of yesterday’s move by the PBOC came just ahead of the opening of the New York markets — the norm up until December 2007 was that PBOC rate hikes were always revealed on Fridays after the stock markets in New York had closed or during the weekends.
Believe me, if some kind of accord between the U.S. and China has been reached, this would be very significant and would be signaling trend reversals in a wide range of markets.
At least in my opinion, the moves we are now witnessing in financial markets are a reflection of a change in the political environment rather than of deterioration in sentiment. This is important to all investors.
We’ll have to wait and see, as always, if I’m right.
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