Worldwide Currency Intervention and the US Dollar

China has been doing it for years. Pegging their currency to the US dollar in order to keep the value of their currency down and the value of the dollar up. They use either newly minted money or money from trade settlements to buy US dollars (Treasuries, stocks, or just cash) on the market. This usually will cause the value of the RNB to go down, while the dollar goes up.

Why do they do this?
Because it keeps their exports cheap in dollar terms. Which means that they can export more and their economy grows. For years this has been going on and China has managed to build up a very large amount of dollars.

However recently nations all across the world have found it necessary to do or talk about doing the same. As the dollar has been falling, other currencies value in relation to the dollar has been rising. Partly due to investors concerned over the US dollar's fall and trying to put money into foreign markets. This is making it harder for most other nations to maintain export levels as a strong currency makes their products more expensive to foriegn buyers. Some countries, unlike the US, rely on exports and not just for the majority of their GDP, and without it their economies will come to a standstill.

Calls for intervention in high Kiwi dollar
Tamaki Says Abrupt Yen Moves May Prompt Intervention

Australian dollar strength raises central concerns

The higher-yielding and risk-sensitive Australian, Canadian and New Zealand dollars have found much support on signs of nascent economic recovery around the globe, leading traders to chuck the safe-haven US dollar over the past several months.

But their central banks, however restrained, do appear concerned with recent currency strength and may seek to hamper further declines for the US dollar.

Israel Battles Currency Speculators

The Bank of Israel embarked on its intervention policy back in April 2008 when it announced plans to buy $25 million daily to weaken the shekel and increase the Jewish state's foreign currency reserves. The amount was increased to $100 million per day a few months later when the shekel hit 3.20 to the dollar ($0.3125), its strongest level in more than a decade.

100 million a day is a lot of money, yet still the shekel is seen gaining against the dollar.

Hong Kong dollar stays strong despite intervention

HKMA on late Wednesday afternoon injected HK$2.325 billion (US$298 million) into the money market to stem an appreciating Hong Kong dollar and keep it within its trading band.

Altogether nations all over the world are doing this, purposely brining down the value of their currency to make the dollar rise. But even collective billions a day cannot seem to slow its new fall. How long will this last until rising commodity prices due to weaker currencies force these countries to stop buying dollars so that their own citizens can afford food, oil and other goods. The rest of the world is not going to keep giving money away just so that America can afford to buy their stuff.

Example:
I sell you a car, you can't afford, so I lend you the money, which you pay me. You want another car, I re-lend you the money you just gave me, you get another car. Over and over and over. Your debt grows "on paper", but I have no cars left.

Eventually it has to end. And when it does I have a feeling that the dollar will jump off the deep end and go down like a rock.

reply to post by oneinthesame


This is an excellent thread, hard to believe no commentators yet. The dollars decline is inevitable given our corporations earnings, the fed monetizing debts, and relative strength of competators in the markets. Like the yuan and euro.

I don't think the inflation being done to lower currency values can go on for too long.. either way, every one looses, but eventually america will be cut loose to save the established economies such as europe. The euro has little to gain from self inflating or having the rest of the world lower currency values.

We hear a lot about B.R.I.C.

The US dollar will loose it's influence but it's hardly going to be the end of the US as a world player or even being a global leader. We just wont be the only one at the table.

Latest news on



B.R.I.C.

Brazil

BRASILIA (Dow Jones)--Brazil's real weakened in afternoon trading to end well lower Monday against a backdrop of slipping commodities prices and a stronger U.S. dollar globally.

Russia

Extending last week's downtrend, the Russian currency plunged further against the US dollar in New York deals on Monday. The ruble slipped to a new multi-day low of 31.8845 versus the greenback by about 1:55 pm ET, which may be compared to Friday's close of 31.6605.

India

Trading volume in Indian currency and bond markets was hit on Thursday and Friday due to a two-day strike by about 900,000 employees at state-run banks, demanding higher wages and pension. [ID:nBOM486486] Continued...

China

SHANGHAI (Dow Jones)--Dollar gains on international markets after Asian trading hours Friday pushed the yuan down against the U.S. unit Monday. On the over-the-counter market, the dollar ended at CNY6.8344, up from Friday's close of CNY6.8318. It traded between CNY6.8340 and CNY6.8355. The dollar-yuan central parity rate was set at 6.8346, up from 6.8316 Friday. The central parity rate has mainly been set between 6.8300 and 6.8400 since mid-December, effectively repegging the yuan to the U.S. dollar.

FOCUS: Gold Market Eyes Dollar For Reaction To Fed Statement

NEW YORK (Dow Jones- The gold market is watching the U.S. dollar as the Federal Open Market Committee meets, because any hints on interest rate hikes or announcement on the Federal Reserve's Treasury-buying program could bolster the greenback and weaken the metal's price.


Fed decisions are key for the dollar, and consequently for gold, because the metal acts as an inflation and currency hedge, meaning it is often bought in times of dollar weakness and sold in times of dollar strength. A stronger greenback also tends to pressure dollar-denominated commodities, such as gold, by making them more expensive in other currencies, damping demand.

[edit on 11-8-2009 by SLAYER69]

reply to post by SLAYER69


Slayer, I agree with you. I don't think that the US status as a world player is threatened at the moment. However the dollar is only rising, because that is what BRIC wants at the moment, therby continuing to make their exports affordable.

Brazil

Brazil's real slipped against the dollar to end slightly weaker Friday as profit-taking and the impact of central bank dollar buying outweighed the effects of trade inflows.
...
Meanwhile, the central bank stepped in to lend support to the dollar Friday with a late-morning currency market intervention, buying dollars at a rate of BRL1.8979.

This article is a couple weeks old, but Brazil's policy hasn't seem to change. Added that any intervention can scare potential speculators and investors for quite a while.

Russia

The ruble had dropped sharply at the start of trading following comments from Anatoly Aksakov, a parliament deputy and member of the National Banking Council, who said in his blog that Russia needs to devalue its currency by 30 to 40% to get the economy back on track. He said doing so would help industry and provide jobs.

Russia likes having a devalued currency, as it is a net exporter of oil and gas.

India

However, the rupee rush was stalled by heavy dollar buying by state-run banks at the INR47.40 levels, traders said.

Traders were, however, split on the source of this buying, with some suggesting the buying was central bank intervention, while others pointed towards oil companies. Traders say that the brief push forward for the rupee may have been premature.

China

China maintains its huge currency advantage by systematically buying dollars with yuan—increasing its hoard of U.S. Treasuries in the process – instead of letting market forces determine its value, which would be much higher than its current pegged rate.

China always tries to keep their currency low, it's part of their central bank's current mandate.

The problem I see is that this cannot continue forever. Foreign governments cannot continue to just buy dollars all the time to let their own currencies fall. Eventually inflation (due to printing money to buy dollars with) and the high cost of imports in their own countries will force them to sell their foreign reserves in order to strengthen their own currency.

China's central bank issues inflation warning

“Failure to manage the degree of easing may lead to concerns about mid- and long-term inflation and exchange-rate stability,” the People's Bank of China said in its quarterly monetary policy report Wednesday.
...
All central bankers profess worries about keeping inflation in check, which is a key part of their job description. But none more so than the Chinese, who fear the widespread social unrest that would be triggered by galloping price increases.
...
When people can't be fed, that's when you've got a problem.”

So far, despite the flood of cheap bank loans and bubbling real estate and stock prices, inflation is not an imminent threat. China has faced falling inflation stemming from overproduction, including massive stockpiling of metals that the economy cannot absorb.

And prices of exports have declined, flooding the global market with even cheaper Chinese goods and triggering a new round of trade disputes.

But the risk of longer-term inflation both at home and abroad hangs in the air, prompting the rhetoric from the central bank.