Chinese Monetary Maneuvers Impact The Dollar
Who could believe that changes in the Chinese economy could impact currency values of other nations! However, with the massive significance that the economy of China has gained in the global economy, maneuvers by China have come to impact world trade and thus currency values. The latest move by the Chinese central bank to raise reserve requirement ratio by 50 basis points, effectively indicating the tightening of monetary policy led the US dollar to make gains against the currencies of commodity exporting nations.
Tightening of monetary policy indirectly means a likely fall in demand for commodities that China imports. Given the size of the Chinese economy, a reduction in demand from China for commodities implies that the fortunes of commodity exporting nations like Australia and New Zealand could be dented. This seems to have led to a fall in the value of the currencies of these two nations vis-à-vis the US dollar.
The Chinese economy faces its set of constraints too. As of now, there appears to be a property bubble in the forming in China due to excess inflow of capital into the nation over the years. This requires tightening of the monetary policy via an increase in the interest rates. However, this may be difficult for China to implement at this point of time as raising interest rates in isolation may actually lead to a higher influx of foreign funds, with interest rates in major developed countries being kept artificially low. Thus, for China to raise interest rates, without the US having done so could actually worsen the property bubble and the Chinese central bank finds its hands tied on this account for now.
The dollar dilemmas that China faces do not end with that. China sits on one of the largest stockpiles of dollar reserves garnered from its years of exports. Any fluctuation in the value of the dollar has massive implications for the buying power of the dollar reserves that China holds. If the dollar falls, it's an outright reduction in the value of dollar reserves for China. No wonder, that the latest statement by the Chinese Sovereign Wealth fund stated that the US dollar has hit its bottom and that it is unlikely to fall further. It appears that the Chinese are worried about a depreciating dollar and are trying to talk it up so that the value of their reserves does not erode.
But, the real economy is the real play that finally determines the inherent strength of a currency. Talk by central bankers can only lead to temporary spikes in a currency's value. While, the US economy had seen some signs of positive growth recently, the latest US job results seem to have led to a setback. Latest data released by the US Labor Department showed that 85,000 jobs were lost in December. This was on the back of November figures which were revised to 4000 jobs added for the month from the original figures of 11000 jobs pared. The sudden increased of job losses in the US seems to suggest that economic recovery is still weak. The news effectively means that the US needs to continue with a low interest rate policy and the dollar would continue to face weakness. Thus, its finally the strength of the real economy that determines the inherent strength of a currency.
Tightening of monetary policy indirectly means a likely fall in demand for commodities that China imports. Given the size of the Chinese economy, a reduction in demand from China for commodities implies that the fortunes of commodity exporting nations like Australia and New Zealand could be dented. This seems to have led to a fall in the value of the currencies of these two nations vis-à-vis the US dollar.
The Chinese economy faces its set of constraints too. As of now, there appears to be a property bubble in the forming in China due to excess inflow of capital into the nation over the years. This requires tightening of the monetary policy via an increase in the interest rates. However, this may be difficult for China to implement at this point of time as raising interest rates in isolation may actually lead to a higher influx of foreign funds, with interest rates in major developed countries being kept artificially low. Thus, for China to raise interest rates, without the US having done so could actually worsen the property bubble and the Chinese central bank finds its hands tied on this account for now.
The dollar dilemmas that China faces do not end with that. China sits on one of the largest stockpiles of dollar reserves garnered from its years of exports. Any fluctuation in the value of the dollar has massive implications for the buying power of the dollar reserves that China holds. If the dollar falls, it's an outright reduction in the value of dollar reserves for China. No wonder, that the latest statement by the Chinese Sovereign Wealth fund stated that the US dollar has hit its bottom and that it is unlikely to fall further. It appears that the Chinese are worried about a depreciating dollar and are trying to talk it up so that the value of their reserves does not erode.
But, the real economy is the real play that finally determines the inherent strength of a currency. Talk by central bankers can only lead to temporary spikes in a currency's value. While, the US economy had seen some signs of positive growth recently, the latest US job results seem to have led to a setback. Latest data released by the US Labor Department showed that 85,000 jobs were lost in December. This was on the back of November figures which were revised to 4000 jobs added for the month from the original figures of 11000 jobs pared. The sudden increased of job losses in the US seems to suggest that economic recovery is still weak. The news effectively means that the US needs to continue with a low interest rate policy and the dollar would continue to face weakness. Thus, its finally the strength of the real economy that determines the inherent strength of a currency.
