Asian, G10 currencies seen rising with yuan strength, dollar to lose value
Fri, 20 May 2011
NEW YORK — Americans worried about a weaker dollar may want to get used to it.
Whatever Treasury Secretary Timothy Geithner may say about a strong dollar being in US interests, the likelihood is that the currency will fall sharply in the next few years. And you don't have to go much further than the pressure Washington is putting on China to revalue the yuan to explain why.
If the yuan appreciates between an annual 5-7 per cent against the dollar over the next five years, as some analysts and traders expect, then the dollar is likely to slide anywhere between 20 to 30 per cent on trade weighted and other indexes based on baskets of currencies.
And that isn't just the direct impact of the yuan on those indexes but because a strengthening of the Chinese currency would have a knock-on impact on trade competitors and partners in Asia and other big emerging markets, who would be more comfortable with allowing their own currencies to rise.
Add to that a correlation that has built up between the yuan and the euro — which have sometimes moved in tandem in recent years — and the positive impact of China's economic growth on the Canadian and Australian dollars and it is difficult to see an argument for a "strong dollar".
"People have been talking about dollar weakness, but we haven't seen anything yet," said Douglas Borthwick, managing director of Faros Trading in Stamford, Connecticut. "We're going to see dollar weakness across the board. For one, we expect the euro to move to $1.50 soon and go even higher when the yuan is revalued."
While the dollar had one of its strongest weeks last week, pushing the euro to its lowest since late March on Monday, the strength is seen short-lived by many and the greenback has still lost about 6 per cent against the euro this year.
Further substantial weakness in the dollar over the long run would have major implications for the US and global economies.
It would make the costs of manufacturing in the US much more competitive but raise the costs of imports, potentially squeezing retailers and consumers. It would make it cheaper for foreigners to visit the US and buy American real estate while adding to costs for Americans going abroad.
This should all help improve the US trade and current account deficits, though the government's budget deficit and debt problems would be more problematic. If the decline in the dollar was too rapid, inflation could climb while China and other nations might reduce their holdings of US treasuries, which could all trigger higher US interest rates and increase the US debt bill.
In the past two weeks, financial markets buzzed with speculation China will further relax its grip on the yuan. The expectations increased after the US Treasury said, based on comments from Chinese officials during high-level talks last week, that the world's second largest economy now sees further currency appreciation as part of its inflation-fighting strategy.
Beijing has already allowed the currency, which is also known as the renminbi, to strengthen gradually in recent weeks for a gain of 0.9 per cent against the dollar in April alone and it has now risen about 5 per cent since Beijing loosened a two-year peg to the dollar last June.
Indeed, since first being allowed to trade within a wider band in 2005, it has risen more than 27 per cent against the dollar.
But the key to the dollar's weakness isn't just the yuan but the impact changes in its value seem to have on other currencies.
Analysts have come to equate yuan gains with a euro rise, partly because the dollar/yuan exchange rate has in the past been quite closely correlated with the ICE dollar index, whose biggest component is the euro with a 58.6 per cent weighting.
The other components in the index are the yen (12.6 per cent), sterling (11.9 per cent), Canadian dollar (9.1 per cent), Swedish krona (4.2 per cent), and Swiss franc (3.6 per cent).
From 2005-2008, the period of flexibility for the yuan before the global financial crisis, the dollar dropped 18 per cent against the yuan — not far off the 22 per cent decline of the dollar index in the same period.
As investors anticipate greater dollar depreciation, they expect less and less funding of the US current account and budget deficits by China. These deficits will have to be funded elsewhere, possibly by some European nations, such as Germany, that have large surpluses.
Jeffrey Young, chief currency strategist, at Barclays Capital in New York said to attract savings from around the world to finance US deficits, some combination of a weaker dollar against either the euro, yen, or sterling and higher US interest rates becomes necessary.
It's probably not coincidental that in the periods after China de-pegged in July 2005 and then again in June last year, there was increased buying by China of euros, sterling, and Australian dollars as a way to diversify its reserves.
The impact of a revaluation doesn't end with gains in the developed world's currencies. A Chinese move will likely prompt a rise in the currencies of Asian nations that compete with China in export markets and whose economies have also been growing rapidly.
Looking at the Federal Reserve's trade-weighted dollar index, in which China is already the largest component at 20 per cent, the picture is just as grim for the dollar.
The index measures the value of the dollar against the United States' 26 largest trading partners and is said to be the currency gauge tracked most closely by central bank officials.
The Fed's broad monthly dollar index adjusted for inflation hit a 38-year low of 81.2781 in April, and could lose another 1.0-1.5 per cent on a one-off China revaluation of 5 per cent.
Add in the weightings of currencies from other Asian nations, emerging markets elsewhere plus Europe and Canada, and that could easily become a bigger loss of 4-5 per cent. — Reuters
Fri, 20 May 2011
NEW YORK — Americans worried about a weaker dollar may want to get used to it.
Whatever Treasury Secretary Timothy Geithner may say about a strong dollar being in US interests, the likelihood is that the currency will fall sharply in the next few years. And you don't have to go much further than the pressure Washington is putting on China to revalue the yuan to explain why.
If the yuan appreciates between an annual 5-7 per cent against the dollar over the next five years, as some analysts and traders expect, then the dollar is likely to slide anywhere between 20 to 30 per cent on trade weighted and other indexes based on baskets of currencies.
And that isn't just the direct impact of the yuan on those indexes but because a strengthening of the Chinese currency would have a knock-on impact on trade competitors and partners in Asia and other big emerging markets, who would be more comfortable with allowing their own currencies to rise.
Add to that a correlation that has built up between the yuan and the euro — which have sometimes moved in tandem in recent years — and the positive impact of China's economic growth on the Canadian and Australian dollars and it is difficult to see an argument for a "strong dollar".
"People have been talking about dollar weakness, but we haven't seen anything yet," said Douglas Borthwick, managing director of Faros Trading in Stamford, Connecticut. "We're going to see dollar weakness across the board. For one, we expect the euro to move to $1.50 soon and go even higher when the yuan is revalued."
While the dollar had one of its strongest weeks last week, pushing the euro to its lowest since late March on Monday, the strength is seen short-lived by many and the greenback has still lost about 6 per cent against the euro this year.
Further substantial weakness in the dollar over the long run would have major implications for the US and global economies.
It would make the costs of manufacturing in the US much more competitive but raise the costs of imports, potentially squeezing retailers and consumers. It would make it cheaper for foreigners to visit the US and buy American real estate while adding to costs for Americans going abroad.
This should all help improve the US trade and current account deficits, though the government's budget deficit and debt problems would be more problematic. If the decline in the dollar was too rapid, inflation could climb while China and other nations might reduce their holdings of US treasuries, which could all trigger higher US interest rates and increase the US debt bill.
In the past two weeks, financial markets buzzed with speculation China will further relax its grip on the yuan. The expectations increased after the US Treasury said, based on comments from Chinese officials during high-level talks last week, that the world's second largest economy now sees further currency appreciation as part of its inflation-fighting strategy.
Beijing has already allowed the currency, which is also known as the renminbi, to strengthen gradually in recent weeks for a gain of 0.9 per cent against the dollar in April alone and it has now risen about 5 per cent since Beijing loosened a two-year peg to the dollar last June.
Indeed, since first being allowed to trade within a wider band in 2005, it has risen more than 27 per cent against the dollar.
But the key to the dollar's weakness isn't just the yuan but the impact changes in its value seem to have on other currencies.
Analysts have come to equate yuan gains with a euro rise, partly because the dollar/yuan exchange rate has in the past been quite closely correlated with the ICE dollar index, whose biggest component is the euro with a 58.6 per cent weighting.
The other components in the index are the yen (12.6 per cent), sterling (11.9 per cent), Canadian dollar (9.1 per cent), Swedish krona (4.2 per cent), and Swiss franc (3.6 per cent).
From 2005-2008, the period of flexibility for the yuan before the global financial crisis, the dollar dropped 18 per cent against the yuan — not far off the 22 per cent decline of the dollar index in the same period.
As investors anticipate greater dollar depreciation, they expect less and less funding of the US current account and budget deficits by China. These deficits will have to be funded elsewhere, possibly by some European nations, such as Germany, that have large surpluses.
Jeffrey Young, chief currency strategist, at Barclays Capital in New York said to attract savings from around the world to finance US deficits, some combination of a weaker dollar against either the euro, yen, or sterling and higher US interest rates becomes necessary.
It's probably not coincidental that in the periods after China de-pegged in July 2005 and then again in June last year, there was increased buying by China of euros, sterling, and Australian dollars as a way to diversify its reserves.
The impact of a revaluation doesn't end with gains in the developed world's currencies. A Chinese move will likely prompt a rise in the currencies of Asian nations that compete with China in export markets and whose economies have also been growing rapidly.
Looking at the Federal Reserve's trade-weighted dollar index, in which China is already the largest component at 20 per cent, the picture is just as grim for the dollar.
The index measures the value of the dollar against the United States' 26 largest trading partners and is said to be the currency gauge tracked most closely by central bank officials.
The Fed's broad monthly dollar index adjusted for inflation hit a 38-year low of 81.2781 in April, and could lose another 1.0-1.5 per cent on a one-off China revaluation of 5 per cent.
Add in the weightings of currencies from other Asian nations, emerging markets elsewhere plus Europe and Canada, and that could easily become a bigger loss of 4-5 per cent. — Reuters
