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Friday, 5 November 2010

Global reserve currencies come with responsibilities, US currency war!

The U.S. Federal Reserve announced Wednesday it would buy 600 billion dollars of Treasury bonds, effectively printing money to jumpstart the flagging American economy.

The move is a boost to the U.S. economy but risks creating new capital bubbles for other countries.

The U.S. dollar is the most widely held reserve currency in the world today. The devaluation of the U.S. dollar plus an overly loose currency policy that leads to a sharp increase in capital flow will drive large amounts of hot money to newly emerging economies in search of profits.

The International Monetary Fund (IMF) has recently warned that Asia and other emerging markets are facing the double risks of a huge influx of foreign capital and an accumulation of inflation pressure.

Chinese Commerce Minister Chen Deming has also pointed out that "out-of-control" U.S. currency issuance and big international commodity price hikes would probably saddle China with imported inflation.

Ironically, one of the factors driving big international commodity prices up is the depreciation of the U.S. dollar, the main global reserve currency.

In the past few months, a vicious cycle of currency flow became obvious. The Fed launched a round of quantitative easing, causing an overflow of capital (hot money pooled in other countries). This led to imported inflation jeopardizing the economies of other countries, which were then forced to intervene in the foreign exchange market.

From the U.S. perspective, the purpose of increasing liquidity is to inject life into its faltering economy. But the direct consequences of the move might be disastrous to other countries. It might even drag others into financial turbulence.

Some economists did not rule out the possibility the U.S. government was deliberately waging a currency war by quantitative easing, depreciating the dollar, shifting the economic risks to others and pursuing the bonus that comes from having a reserve currency.

According to a report from the Organization for Economic Cooperation and Development (OECD) on Wednesday, continued loose monetary policy in many advanced economies will prompt capital to flow to emerging ones where it risks creating asset bubbles while putting upward pressure on their exchange rates.

OECD Secretary General Jose Angel Gurria said bubbles were generated in the emerging economies, which "still have a high level of inflation or ...(face) pressure of inflation," when advanced economies took advantage of their weaker and more restrictive monetary policies.

Nobel laureate Joseph Stiglitz said that, when trying to reignite the U.S. economy by printing money, the flood of money was almost surely contributing to global financial instability and prompted countries worldwide to intervene. And the result was a "more fragmented global financial market."

Last month, G20 finance ministers and central bankers promised in a joint statement to "pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels."

During the China-U.S. strategic and economic dialogue in May, the U.S. also vowed to adopt a proactive currency policy and pay attention to the impact of its currency policy on the international economy.

The reason why the outside world follow the attitudes of advanced countries so closely is that they are the source of the rivers of hot money.

Whether the world economy can achieve a sustainable recovery largely depends on whether the main global reserve currency countries can put into practice their promises to keep exchange rates comparatively stable and reduce the negative spill-over effect of their currency policies.

At the time when the world economic recovery is still unstable, it is an unshirkable task for the main global reserve currency countries to adopt responsible currency policies for the benefit of all.

Source: Xinhua
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Also see the related early post::
U.S. Fed to buy 600 billion dollars in bonds as quantitative easing, Dollar tumbles!



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Thursday, 4 November 2010

IMF says fiscal risks elevated in advanced economies

The global fiscal deficit will fall in 2010 compared with last year, but fiscal risks remain elevated in advanced economies, according to a report released by the International Monetary Fund (IMF) Thursday.

The report said public debt ratios as a percentage of gross domestic product (GDP) were still rising rapidly in some advanced economies.

In its latest edition of the Fiscal Monitor, Fiscal Exit: From Strategy to Implementation, the IMF sees fiscal tightening becoming broader and driven by discretionary measures in 2011, in both advanced and emerging economies, but underscores the need for more clarity on exit plans and reforms to address long-term fiscal costs.

The study, released twice a year, said that "the global fiscal deficit is projected to fall from 6.75 percent of GDP in 2009 to 6 percent this year." This was in line with IMF's earlier projections.

The report also said the global fiscal deficit will fall further in 2011 to about 5 percent of GDP. About 90 percent of countries are projected to record smaller deficits next year (relative to 2010), with most of the deficit decline due to policy tightening. The projected pace of tightening is broadly appropriate, striking a balance between addressing fiscal concerns and avoiding an abrupt withdrawal of support to the nascent recovery.

The IMF noted that "risks for advanced economies, especially those already under market pressure, remain high by historical standards. Among them are the possibility of sovereign rollover problems arising, over the short to medium term, at a regional or global level, and public debt ratios stabilizing, over the longer run, at elevated levels."

"These risks are lower but not insignificant for emerging markets," it added.

The report also said risks arising from macroeconomic uncertainty were generally higher than six months ago, amid concerns that the global recovery might be losing steam. Global market sentiment had improved toward emerging markets but worsened toward those advanced economies that were already under pressure in May 2010, it said.

Source: Xinhua
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Wednesday, 3 November 2010

U.S. Fed to buy 600 billion dollars in bonds as quantitative easing, Dollar tumbles!

U.S. Fed to buy 600 billion dollars government bonds


Traders work on the floor of the New York Stock Exchange in New York, Nov. 3, 2010. Wall Street swung to gain on Wednesday after the U.S. Federal Reserve announced a plan to buy 600 billion U.S. dollars more in Treasury bonds. (Xinhua/Shen Hong)

U.S. Federal Reserve announced Wednesday it will buy 600 billion dollars more in Treasury bonds, in a move known as the "Quantitative Easing" (QE2) monetary policy to boost the sluggish economic growth.

"The pace of recovery in output and employment continues to be slow," the Fed said in a statement after the policymaking panel meeting.

Federal Open Market Committee (FOMC), the interest rate policy making body of the central bank said that it will "purchase a further 600 billion dollars of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about 75 billion dollars per month."

The Fed also decided to maintain the target range for the federal funds rate at historic low level of zero to 0.25 percent to stimulate the economic recovery.

The central bank cut the interest rate to the current level in December 2008 to tackle the worst recession after the Great Depression in the 1930s. And it has already bought about 1.7 trillion dollars in U.S. government debt and mortgage-linked bonds.

With the U.S. economy growth at only a 2 percent annual pace in the third quarter of this year and the jobless rate seemingly stuck around 9.6 percent, the Fed has come under pressure to do more to stimulate business activity.

Bernanke and his supporters argue that the Fed is failing in both fronts of its dual mandate: sustainable levels of unemployment and inflation.




The Dow Jones index is seen in the New York Stock Exchange in New York, Nov. 3, 2010. (Xinhua/Shen Hong)

The Fed said that to expand its holding of government securities is "to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate."

Latest data showed that core consumer price index, the key figure to measure inflation, grew only 0.8 percent in September on a yearly base. It was lower than the Fed's comfortable level of inflation ranging from 1.5 percent to 2.0 percent.

In fact, the Fed expressed its concern about deflation in recent documents.

On the unemployment front, with 14.8 million Americans unemployed and unemployment rate hovering at double digit, the Fed has been facing criticism.

Aiming at further lowering borrowing costs for consumers and businesses that are still suffering from the worst recession since the Great Depression, the Fed's QE2 policy is widely questioned.

Many economists doubt about the policy's effectiveness and worry about its spillover effect on the rest of the world.

"The Federal Reserve's proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilize the global economy," Harvard University economist Martin Feldstein said an article published by the Financial Times on Wednesday.


"Although the U.S. economy is weak and the outlook uncertain, QE is not the right remedy," said the former president of the U.S. National Bureau of Economic Research and former chief economic adviser to President Ronald Reagan.

Critics of the policy also argue that although the recovery is painfully slow, markets should be allowed to do their work. They also worry that if the policy fails the Fed's credibility will be wrecked.

Economists consider that economic growth must reach about three percent for some time to significantly reduce high unemployment.

But more than a year after the recession officially ended, unemployment stubbornly stands at high level.

Economists expect that October's jobless rate, which will be reported on Friday, will remain at 9.6 percent for the third straight month.

Source: Xinhua

Dollar tumbles on Fed's stimulus plan

The U.S. dollar tumbled against major currencies in late New York trading on Thursday after the Fed announced a new round of quantitative easing policy on Wednesday.

The euro rose to above 1.42 against the dollar in late trading session, while the Australian dollar rose dramatically to near 1. 015 against the dollar, its 28-year high, after the Australian central bank announced that it will raise its benchmark rate this week.

The stock market surged as investors anticipated large amount of money would flow into real economy by the Fed's move. The reviving optimistic mood in equity market also pressured on the dollar as high-yield investment appeared to be more attractive to investors.

However, the U.S. employment status still showed weakness. A report released by the Labor Department on Thursday showed initial claims for state unemployment benefits increased 20,000 to a seasonally adjusted 457,000 last week, which was much more than previous estimate of increasing by 9,000. In late Thursday trading, the dollar bought 80.66 Japanese yen, compared with 81.29 late Wednesday, and the euro rose to 1.4209 dollars from 1.4103.

The British pound rose to 1.6284 dollars from 1.6107. The dollar fell from 0.9730 to 0.9583 against Swiss francs, and also fell to 1.0034 Canadian dollars from 1.0059.


Source: Xinhua

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