Tag Archives: Economics: Currencies

That Dreaded D Word

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“Dial D for Deflation” declared the Economist in 2002 in an article which amazingly is still available online. Since Alan Greenspan officially declared the deflation scare over, the word has hardly cropped up in economic debates.

Yet anyone looking at the rapid rise in value of the euro, and the absence of growth in some key economies – Germany, Italy – could have been forgiven for thinking that the ‘all clear’ signal was being given a bit too soon.

Today the latest EU inflation figures are out from Eurostat (PDF file), and Goldman Sachs are warning that: ?without preventive action from the ECB, unit labour costs threaten to pose a future risk of deflation?.
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Just In Time?

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Tony Blair inched home to a historic Labour third term in the UK last week. But looking at the changing tempo of the British economy over the last couple of months, you could be tempted to ask: was this a case of ‘just in time’ electioneering?

At the present time there seems to be a general consensus that Blair will back down during this parliament, and that the natural heir apparent is Economics Minister Gordon Brown. However if Blair won the election despite the Iraq war, and thanks mainly to economic prosperity, we could ask ourselves whether changing winds of fortune might not make the heir rather less apparent when the time for handing over actually comes.
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An Asian IMF?

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Yes, that’s what Bloomberg’s William Pesek suggests we might see evolving. As Pesek notes, the creation of an Asian Monetary Fund would:

“have major consequences for the global elites and the so-called “Washington Consensus” on how developing nations should go about raising living standards for their swelling and often poor populations.”

In particular, if this came off, not only would we be talking about a European social model, we would also be looking at an Asian one.
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ECB: Rate Cut In The Autumn?

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Despite a widespread feeling that interest rates in Europe may be about to rise, futures markets seem near to pricing in a rate cut for the second half of the year.

One interesting knock-on consequence of this that no-one seems to be twigging is that any such move might well cramp the style of Alan Greenspan over at the US Federal Reserve. To date everyone is imagining that interest rates in the US will continue to rise at a ‘measured’ or ‘not so measured’ pace. But with the current account deficit to worry about there will be a limit to how far Greenspan can push the difference in rates (or spread) without driving up the dollar, something I’m sure he dearly wants to avoid doing.
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ECB: Plus ?a Change?

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The ECB met earlier today to conduct the monthly review of interest rate policy. It came as a surprise to noone that the outcome was to leave everything just as it is. Surprisingly though the decision this month is surrounded by a little more controversy than has been the case of late since Italy’s Berlusconi and economic opinion in Germany have been suggesting that some reduction of rates might be no bad thing, whilst Spain’s economy minister (and former EU commisioner) Pedro Solbes is reported to have been pushing for an increase. Why the difference?
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China’s Currency and Trade

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Currency traders around the globe lazily staring into their screens must have found themselves transfixed last Friday when the flatline indicating the value of the Chinese yuan (or renminbi if you prefer) suddenly jumped to life. And so it was that during a brief 20 minute interval the yuan surged to a level of 8.270 to the dollar from the hypnotic and seemingly eternal value of 8.276. Now 6 thousandths of a dollar isn’t really a very big deal, but it is the sheer fact that it happened that is causing all the fuss.
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Scary Stuff

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In a post which appeared earlier this week Tobias asks us whether, given some of the possible consequences of a French “non”, it might not be reasonable to ‘scare’ voters a little by spelling out some of the potential fallout which might follow a French rejection of the Constitution Treaty.

Perhaps the phrasing is unfortunate, but undoubtedly voters in Eurozone countries need to think long and hard about one especially sensitive area of impact: the future of the euro itself.
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The World As Optimum Currency Area?

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I was a little surprised to read in the Christmas edition of the Frankfurter Allgemeine Sonntagszeitung (not yet online, subscription wall, in German) that Robert Mundell seems to have changed his mind. In his seminal 1961 paper about monetary integration, he famously stated that “the optimum currency area is not the world”. Now it appears he favors a sort-of worldwide currency union, initially comprising Dollar, Euro, and Yen (apparently, he’s also made that point earlier this year in Lib?ration (subscription wall, in French)).
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Another Record High For The Euro

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The euro today again broke through to a new high at $1.3329. This was on the back of an unexpected decline in US consumer confidence. What seems to be happening is that any piece of good news in the US temporarily stems the rise, whilst bad news sets it off again. And this despite the fact that the the European Commission itself released some pretty depressing business confidence numbers for the eurozone.

Meanwhile ECB president Jean Claude Trichet meticulously failed to mention the possibility of central bank intervention in closely watched comments to the European Parliament’s economic and monetary committee, restricting himself to repeating that currency movements like the ones we are seeing now are ‘not welcome’. So we seem set to continue on towards the $1.35 level. What happens then we’ll see if and when we get there. As they say somewhere: “this ain’t done till it’s done”.

Central Bank Blues

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In a fairly ironic and cryptic post yesterday I alluded to the potential influence of the Russian central bank on the value of the euro. This situation is not to be taken lightly. The euro today hit another record passing the 1.32 to the dollar mark. At the same time business confidence index readings from Germany and Italy indicate that those who need to export are none too happy about the future.

A Russian move to raise euro reserve holdings from 30% to 40% of the total, mentioned as a possibility in an FT article yesterday, could have profound consequences:

Neil Mellor, currency strategist at Bank of New York, raised the prospect of a potential domino effect: ?Talk of central banks readjusting their reserves to encompass a greater euro weighting has been rife in the foreign exchange markets for quite some time, along with speculation that OPEC members may shift to euro-denominated oil sales.

?A dam can only take so much pressure. Russia?s stated intent to review its reserve weightings, in favour of the euro once again, could well lead to similar announcements by its counterparts across the world.?
Source: Financial Times

So the danger is that if Russia initiates others may follow. A fall in the dollar’s value of say 30% over 3 years would be one thing, but a rapid fall of this kind of magnitude precipitated by a shift in central bank holdings over a limited time horizon would be quite another. This is definitely one to watch.