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Strong elbowing in foreign exchange markets

Foreign exchange policies are becoming a critical tool for countries affected by the financial crisis. With much uncertainty surrounding future economic growth, many countries are turning to protect their export base and employment by cherishing their low exchange rate:
-A lower US$ was meant to stimulate US exports and tilt the country into sustainable economic growth. It is not working out as planned. The drop in the Euro this year has at long last clipped the overvaluation of the Euro, a source of major complaints for the Europeans. You can now bet the Euro will remain on the down side for a while. This in turn will complicate economic recovery in the USA.
-China is shifting its Yuan policy from a US$ peg to a basket of currencies. This is unlikely to lead to a stronger Yuan, as it means buying other currencies for reserves purposes, such as the Yen. And as a result, the Yen has recently shot up, much to the annoyance of Tokyo and Japanese exporters.
-The massive reserves of the Chinese Central Bank, estimated at US$ 2.4 trillion, are proving to be a reliable source of power and influence: China now has the muscle to intervene in various markets: Commodities, currencies, metals, distressed banks, etc… Just recently China was one of the players that moved in to limit the drop of the Euro. This ‘reserve’ power rests on the capacity of the country to attract FDI and turn them into export machines. Thus low manufacturing costs and an undervalued currency will continue to serve not only to generate the employment required to absorb urban migration, but also to buy influence around. This source of power is too comfortable and politically useful to let it go. China is essentially using the Capital money of foreigners to push forward its own agenda. The Yuan needle will not move up by very much for the time being.
-Interestingly other Asian currencies, such as the Korean Won, are still lower than at the outset of the financial crisis in 2008.

At the other end, strongish currencies propped up by high commodities prices, such as the C$ or the A$, have no choice but to work on the competitiveness of their exporting firms. They have little room to devalue. No wonder a host of countries have started to play elbows in the currency markets. We can expect volatility in currencies to carry on for a quite a while.

André Du Sault

Posted in CFO & treasury, World economy.

Tagged with , , , .

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