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More US dollars sloshing around may pose dangers
By Ye Shuhong and Chen Jipeng |
October 14, 2010, Thursday
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Print Edition
Print Edition
IT doesn't take "CSI" to figure out who fired the first shot in the latest currency dispute.
In early September, news that the US Federal Reserve was leaving its door open for a second round of quantitative easing started to make headlines, spurring the building of short positions on the market.
This second phase of quantitative easing, dubbed QE2, has been widely viewed "an atomic bomb," given that the Fed's purchases of assets such as bonds will inject further huge liquidity into the US economy.
It wouldn't bother other countries very much had the US dollar not been the dominant international reserve currency. But given the "exorbitant privilege" the US has long enjoyed in currency hegemony, it is no surprise that the move worries other countries concerned at the prospect of being flooded with cheap US dollars.
The US dollar has been weakening since mid-September against other currencies such as the Singapore dollar, the Thai baht, the Malaysian ringgit and the Indonesian rupiah.
The Japanese yen hit its highest in 15 years against the US dollar last Friday on the New York market. Japan took to public intervention in the forex market for the first time since 2004. There is also speculation that the Thai government might also intervene publicly.
The central bank of Brazil hurriedly put in place a flurry of measures to limit the gains in its exchange rate. Even so, the Brazilian real was stronger Monday.
"We are in the midst of an international currency war ... Advanced countries are seeking to devalue their currencies," Brazilian Finance Minister Guido Mantega said recently. "'Currency war' might be too strong a term, but the fact that countries want to find domestic solutions to a global problem is really a threat to the recovery," said International Monetary Fund chief Dominique Strauss-Kahn, who warned against using currency as a "policy weapon."
The United States has been happy to see or even willing to act for a weak US dollar for its economic interests and, last but not the least, to cater to the demands of a relentless domestic political cycle.
High unemployment, which has recently fed populist sentiments in the US, was partly explained by the deep entrenchment of the housing sectors, said Jeremy Warner, assistant editor of The Daily Telegraph.
These sectors have represented a larger proportion of employment in the US than in Britain or other countries in Europe, and won't begin to recover until prices stabilize and unsold stock is cleared, he wrote in a column on Monday. "Beneath this sense of frustration at lack of progress - and at international organizations such as the IMF and the G20 to bring it about - there is an underlying truth that is often left unspoken; many of the problems in the world economy right now are not international at all, but US specific and can only really be solved by America itself."
It is the view of many scholars, including Nobel laureate in economics Joseph Stiglitz, that the QE2 will not benefit the US economy, but will cause chaos in the international system and cost others dearly, in addition to creating long-term risks of high inflation for itself. (Ed: See "Time for the Fed to learn from past mistakes" published in Shanghai Daily's opinion page yesterday.)
(The authors are Xinhua writers.)
In early September, news that the US Federal Reserve was leaving its door open for a second round of quantitative easing started to make headlines, spurring the building of short positions on the market.
This second phase of quantitative easing, dubbed QE2, has been widely viewed "an atomic bomb," given that the Fed's purchases of assets such as bonds will inject further huge liquidity into the US economy.
It wouldn't bother other countries very much had the US dollar not been the dominant international reserve currency. But given the "exorbitant privilege" the US has long enjoyed in currency hegemony, it is no surprise that the move worries other countries concerned at the prospect of being flooded with cheap US dollars.
The US dollar has been weakening since mid-September against other currencies such as the Singapore dollar, the Thai baht, the Malaysian ringgit and the Indonesian rupiah.
The Japanese yen hit its highest in 15 years against the US dollar last Friday on the New York market. Japan took to public intervention in the forex market for the first time since 2004. There is also speculation that the Thai government might also intervene publicly.
The central bank of Brazil hurriedly put in place a flurry of measures to limit the gains in its exchange rate. Even so, the Brazilian real was stronger Monday.
"We are in the midst of an international currency war ... Advanced countries are seeking to devalue their currencies," Brazilian Finance Minister Guido Mantega said recently. "'Currency war' might be too strong a term, but the fact that countries want to find domestic solutions to a global problem is really a threat to the recovery," said International Monetary Fund chief Dominique Strauss-Kahn, who warned against using currency as a "policy weapon."
The United States has been happy to see or even willing to act for a weak US dollar for its economic interests and, last but not the least, to cater to the demands of a relentless domestic political cycle.
High unemployment, which has recently fed populist sentiments in the US, was partly explained by the deep entrenchment of the housing sectors, said Jeremy Warner, assistant editor of The Daily Telegraph.
These sectors have represented a larger proportion of employment in the US than in Britain or other countries in Europe, and won't begin to recover until prices stabilize and unsold stock is cleared, he wrote in a column on Monday. "Beneath this sense of frustration at lack of progress - and at international organizations such as the IMF and the G20 to bring it about - there is an underlying truth that is often left unspoken; many of the problems in the world economy right now are not international at all, but US specific and can only really be solved by America itself."
It is the view of many scholars, including Nobel laureate in economics Joseph Stiglitz, that the QE2 will not benefit the US economy, but will cause chaos in the international system and cost others dearly, in addition to creating long-term risks of high inflation for itself. (Ed: See "Time for the Fed to learn from past mistakes" published in Shanghai Daily's opinion page yesterday.)
(The authors are Xinhua writers.)
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