Biggest effect of a stronger euro and a weaker yen/dollar will be felt in emerging markets such as China and Brazil
Pick your metaphor.
The tide has turned. The weather is changing. The momentum has shifted with the change in quarterbacks.
Anything works as long as it 1) describes the current reversal in strength by the euro against the yen and U.S. dollar and 2) reminds us that the reversal is itself easily reversed and that we don’t know much about the timing of that reversal.
I prefer “tide” myself because it suggests not just the turn in the currency markets but a change in the flows that all financial assets swim against or with. The reversal in the relative strengths of these big three currencies will, after all, have an effect on everything from earnings at big U.S. multinationals such as IBM (IBM) and PepsiCo (PEP) to the price of commodities and commodity stocks to the balance of imports and exports in China to the growth rate of the Brazilian economy.
The biggest effect, though, is likely to be on the prices of stocks in emerging markets such as China and Brazil. Read more
Faster than expected, here’s comes the yuan–and I’ve got some suggestions for ways to play the rise of China’s currency
Throughout the global financial crisis, even as the crisis changed its focus (and name) from the U.S. mortgage-backed securities crisis to the euro debt crisis—the United States could find solace in the strength of the dollar. It may not have been a currency backed by the largest gold reserves or a well-run fiscal policy, but it only needed to be less bad than its global competitors. And up against a euro that threatens to come apart and a yen backed by a Tokyo government with an even bigger debt problem than Washington has, the dollar looked good enough.
For liquidity, for the depth of its markets, for its ease of transfers and payments, the dollar was relatively strong because the competition was relatively weak. The dollar was a global currency without real competition. That’s been critical to allowing U.S. Treasury prices to rally and U.S. yields to fall even as the country lost its AAA credit rating.
The dollar isn’t without long-term competitive threats, however. The most obvious of those has long been the Chinese renminbi or yuan. (China’s currency is named the renminbi. The units of the renminbi are the fen, jiao, and yuan. It takes 10 fen to make a jiao and 10 jiao make a yuan. It’s as if the U.S. currency was named the dollar, but its units were called the George, the Alexander, and the Benjamin.) But that threat, while acknowledged as real, has always seemed very, very distant.
Well, I think it’s time to at least take one of those “very”s off the timeline. China is moving more quickly than expected to turn its currency into a true global alternative. It still remains to be seen if the Beijing government can fully bring itself to give up the kind of control over its currency that would be necessary to turn the renminbi into a real alternative to the dollar. China’s economic policies are so grounded in the government’s ability to control not just the exchange rate but the flow of its currency in and out of the country that the renminbi may never gain the currency market share that China’s economy and reserves could command. But the global financial crisis—and the damage suffered by the euro, which had looked like a true alternative to the dollar before the euro debt crisis—have pushed Beijing into action faster than projected even just one or two years ago.
Any real challenge to the dollar from the renminbi isn’t going to come tomorrow, but I don’t think investors should take the long-term supremacy of the dollar for granted. The likelihood of slippage in the dollar’s global role has implications for global stock and bond markets, for U.S. interest rates, and for U.S. economic growth rates that you should at least consider in formulating any long-term investment plan.
The latest move—announced just last week and planned to take effect in the third quarter of the year—is to me a bombshell that indicates just how surprisingly fast the currency game is changing for the renminbi. (And it even suggests a few stocks you might want to consider for your portfolio to take advantage of the long-term currency trend.)
What happened last week? Read more
China caught global financial markets flatfooted today, October 19, by raising its benchmark interest rates for the first time since 2007.
The People’s Bank of China raised its one-year lending rate to 5.56% from 5.31% and its deposit rate by 0.25 percentage points to 2.5%.
The move sent markets lower around the world. The Dow Jones Industrials were down 0.9% as I wrote this at 1:20 ET in New York. In Europe the FTSE 100 was down 0.7%. And Brazil’s Bovespa was down 1.6%. (The People’s Bank made the announcement after markets in China were closed for the day.)
The timing of the rate increase has set off rampant speculation. China almost never changes its benchmark rates preferring moves such as raising bank reserve requirements as the People’s Bank did last week. So why raise the benchmark rate now? Read more
China and the U.S. are increasingly at odds on currencies and the global economy as the stage shifts from the IMF to the G20
The annual meeting of the IMF (International Monetary Fund) ended with the U.S. accusing China of keeping the yuan artificially low and with China accusing the U.S. of flood merging markets with hot money by keeping its interest rates near 0%.
I think Brazil got it just about right when it said, “A pox on both your houses!”
All of this bodes ill for the meeting of the G20, the club of the world’s largest economies, that ends with a leaders’ summit in Seoul on November 11-12.
I’d be surprised if the G20 meetings managed much more than a face-saving statement of unity.
Yesterday, October 13, Japan ratcheted up the tension by calling on China and South Korea to let their currencies appreciate.
Nice way to treat your hosts even before you arrive.
Anyway, back to the IMF’s meeting in Washington last week: Talk about disagreements about the basics of the global economy. Read more
Do you think he reads this site?
“We’re in the midst of an international currency war,” warned Brazil’s finance minister Guido Mantega on September 27. Governments around the world are competing to drive down their currencies to boost their exports.
How dangerous could that be? Well, in my September 20th post I compared the destructive potential of a global beggar your neighbor currency war to the Smoot-Hawley tariff of 1930 that helped turn the stock market crash of 1929 into the Great Depression. (See my post http://jubakpicks.com/2010/09/21/japans-intervention-to-drive-down-the-yen-is-more-dangerou-than-it-looks-remember-smoot-hawley-and-the-great-depression/ )
Brazil’s finance minister didn’t name names but last week the country’s foreign minister Celso Amorim went to great lengths to defend China from charges that kept its currency artificially depressed. Read more