Why China Should Not Dump the Dollar

In fact, China may have to increase its exposure to the dollar, according to the comments of Brad Setser of the Council of Foreign Relations: "In my mind, so long as China resists more rapid appreciation of the renminbi versus the dollar, it’s rather difficult for China to diversify in any meaningful way against the dollar. If China really started to diversify away from the dollar, I think it’s a big enough player that it would put downward additional pressure on the dollar."

ECB to Hold Rates

The European Central Bank (ECB) will likely maintain its benchmark interest rate at 4.00% at its meeting his week.  The Bank of England is also expected to hold its lending rate in place, at 5.75%.  While these two moves should be seen by Dollar bulls as acts of clemency, they are more akin to a stay of execution than to a commutation of its death sentence.  The reasoning is that it is inevitable that the US-EU interest rate difference will be bridged over the next few months, as the Fed continues to lower rates while the ECB is in the process of hiking them.  The only question is when.  Accordingly, analysts will be paying close attention to the language employed by the heads of the various Central Banks at their next meetings to get a sense of timing.
Read More: Dollar hovers above lows

China talks up Diversification

A high-ranking official in China’s government recently gave a speech urging the Central Bank to (continue to) diversify its vast holdings of foreign exchange, currently estimated at $1.4 Trillion and rising.  The speech was atypical in its level of directness, as Chinese officials tend to speak with a certain degree of circumspection if
they think there is any possibility that their comments will reach the public. Specifically, he advocated making

Loonie Set to Surge Further

The Canadian Dollar, or Loonie, recently cleared a 47-year high against the US Dollar.  Its next major milestone is crossing a level last seen in the late 19^th century! There are a few reasons for the Loonie’s continued strength, namely interest rate parity and economic strength.  As a result of the Fed cutting rates for the second time in as many months, the Canadian benchmark interest rate is now equal to the American federal funds rate, both at 4.5%.  In addition, record-breaking oil and commodity prices will ensure that Canada’s economy will expand further, perhaps as the same pace as its currency.  Reuters reports:

If the U.S. Central bank signals another rate cut in December, or if it goes against expectations and chops rates by 50 basis points, it could pull the rug out from under an already unsteady U.S. dollar and clear the way for the Canadian currency to shoot higher.

Read More: Loonie eyes 130-year high if Fed makes big rate cut

Chinese Yuan Reaches Milestone

The Chinese Yuan has crossed the psychological barrier of 7.5 RMB/USD, a level last seen nearly a decade ago.  The currency’s appreciation has been gradual but visible, not withstanding the cries of western bureaucrats.  By all accounts, the Yuan will continue rising, though not at the same pace as its trade surplus, which is projected to jump from $177 Billion in 2006 to $300 Billion in 2007.  Predictions regarding the

US Presses China to Revalue

You have to admire the US for its persistence in pressuring China to appreciate the Yuan, though it’s not as if anyone seriously expected it to back off. Fresh from the recent G8 conference and enjoying the spotlight of the media, US Treasury Secretary Hank Paulson called in China to put its money where its mouth is, and relax its hold on the Yuan. Paulson expressed dissatisfaction with the pace at which the Chinese currency has appreciated – approximately 10% since 2005.  He even insinuated that there would be repercussions for the

Commentary: Will the US Intervene on Behalf of the Dollar?

At last week’s G8 meeting in Washington, it was expected that currencies would be a hot topic of discussion.  With the Dollar retreating to record lows on a daily basis, the failure of China to allow the Yuan to appreciate, the Japanese Yen’s continued weakness despite its strong economy, and the recent parity of the Canadian Dollar and USD, there are certainly plenty of forex phenomena that deserve attention.  However, it is the Euro/USD relationship that probably received the most scrutiny, as the biggest contingent of the G8 uses the Euro.