Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
THERE ARE FEW THINGS MORE CERTAIN in the currency markets that if something's denied by some high official, preferably the head of some august international body, it must be true.
In that vein, World Bank President Robert Zoellick's Tuesday denial the world was headed toward a currency war, only "tensions" amid global imbalances, wasn't reassuring.
"I don't foresee that we're moving into an era of currency wars but there's clearly going to be tensions, particularly if you have countries that have trade or current-account surplus that are intervening to keep their currencies [low]," Zoellick said ahead of this weekend's annual meetings of the World Bank and International Monetary Fund in Washington.
Almost as inevitable when tensions (or whatever you call them) threaten instability in the currency markets are calls for a League of Nations of sorts to deal with it, and usually with equal success as that body.
The Institute of International Finance warned Monday that a lack of a new agreement on exchange rates could lead to protectionist measures. That's most evident in the vote by the U.S. House of Representatives last week to slap tariffs on China for keep down the value of its currency, the renminbi, just before it adjourned for key midterm elections next month.
Yet, government efforts aimed at holding down their currencies to maintain their economies' export competitiveness in a world of weak demand is almost universal. Last month, the Bank of Japan intervened to sell some ¥2 trillion to try to reverse the Japanese currency's relentless rise, which is crippling that nation's exporters.
Similarly, monetary authorities in countries as diverse as Switzerland and Brazil and east Asia have intervened to lean against their currencies.
Against the Swiss franc, the dollar bought a 97.23 centimes Monday, a record low, despite intervention by the Bank of Switzerland. Brazilian authorities have attempted to lean against the relentless rise in the real, which has been pushed up by high real (inflation-adjusted) interest rates, climbing to a two-year high. In response, Brazil doubled its tax on foreign investors who buy its bonds to take advantage of high yields, to 4%. And in Asia, the high-tech powerhouses of Taiwan and South Korea have been trying to counter their currencies' rises.
There are two sides in every conflict, however, and these currencies' strength can be also seen as reflection of the dollar's weakness. The U.S. currency has moved steadily lower since peaking around midyear as the European sovereign debt crisis came off the boil and amid signs that the U.S. economy was stalling.
Still, the anomaly of the rising euro and Europe sinking into depressions and unrest was stunning. With economies from Eire to the Iberian peninsula down to Greece in the Mediterranean plunging into virtual depressions amid mounting social unrest, the rally in the euro back to $1.37 from below $1.20 in the spring was puzzling, to say the least.
At least until Chinese Premier Wen Jiabao declared his nation backed the euro and Greece in particular. "I have made clear that China supports a steady euro," he told the Greek parliament Sunday and the beginning of week-long European tour. "China not be reducing its European bond holdings."
Indeed, Wen said China would be interested in buying more Greek bonds once the Hellenic Republic returned to the public markets. (Greece received a €110 billion bailout from the IMF and European last May, which has obviated its need to issue bonds this year.
China's investments can be seen as a driver (at the margin, to be sure) of capital flows and thus exchange rates. China's deployment of some of its massive currency reserves into Japanese government bonds, which helped push up the yen, aroused concerns in Japan, as noted here previously ("Central Banks Embrace Risky Gambit".)
China has stated its desire to diversify its currency exposure away from the dollar. But China clearly wants to the euro to survive as a viable alternative to the U.S. currency. Sustaining Europe is important to the global economy, and thus China, which depends on exports. Buying JGBs pushes the yen higher and increases China's competitiveness with Japan—and may be causing consternation similar to that of the U.S.
But the biggest driver of the currency markets is U.S. monetary policy, which is widely expected to embark on another round of so-called quantitative easing. The prospect of a further expansion of dollar liquidity from the Federal Reserve's resumption of large purchases of Treasury securities is the main factor weighing on the greenback and Treasury yields. On the latter score, the two-year note, which reflects expectations of future short-term interest rates, fell to a record low yield under 0.4% Monday, an excruciatingly lower 0.3987%.
To reiterate the point made in the aforementioned column, central-bank monetary policy actions increasingly are being transmitted through the currency markets. Short-term interest rates already are at zero and credit continues to contract as banks are loath to lend and borrowers are less than willing or able to take on debt. Booming corporate bond issuance mainly is going to refund other borrowings, acquire other companies, repurchase stock or pay out dividends—none of which is expansionary for the economy.
A competitive currency is a way to get a bigger slice of a stagnant economic pie. In this game, for every winner there is a loser. And the countries that need the outlet of exchange-rate adjustment the most—the weak members of the eurozone—are precluded from doing so. Those that can, notably the U.S., do so. That's why the major trend in the dollar is lower.
E-mail: randall.forsyth@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
Credit Suisse says Masco, Mohawk Industries and USG will feel some pain.
Caris & Co. raised the price target on the e-commerce servicer to $40.
T. Rowe Price's Tim Parker shares his favorite natural-resources names.
Credit Suisse expects same-stores sales rising 4%-6% at Costco.
Ticonderoga says the energy firm may underperform again.
As the leading European Coca-Cola bottler, we think the company's stock can deliver sweet returns.
Caris & Co. sees NetLogic and Volterra getting valuation benefit.
Intel, Broadcom and others are seen as cash-flush.
Goldman Sachs downgraded the software giant to Neutral.
Wedbush says Cisco, Polycom, ShoreTel and Radvision are in its sights.
Sandler O'Neill says buying has offset Treasury sales of Citi stock.
The life insurer warned that low treasury yields could clip earnings. However, it said any impact would not be "material."
Caris & Co. says H-P may look to bolster its hardware lines.
Ticonderoga upgraded the financial-services firm to Buy from Neutral.
Sandler O'Neill sees a $700 million debt-valuation adjustment loss.
Companies like these are benefitting from recent factory trends. (At SmartMoney.com.)
United Technologies has a lower profile than some other industrial titans, but its prospects look decidedly bright.
The most awesome thing about this last month's surge in stocks is that it was pretty much a "look-mom-no-hands" performance.
Read Full Article »