by Adil Siddiqui, Independent Financial Services professional.
The currency war seems to be the new buzz word after the subprime credit crunch; undoubtedly it seems that the world recession is coming to an end – maybe not. With most of the developed nations suffering 50 to 60% public debt to GDP a divergence looks eminent.
China has been blowing air in its currency bubble to maintain its economic growth. The People’s Republic has continued to withstand the pins and needs Geithner and his boys keep pricking up. The Yuan stills trade at around 6.7 to the dollar, and exports still are rising; October saw $136 billion worth of global exports constituting 39.7% of GDP.
Japan on the other hand tried to play its cards right buy selling $25 billion yen to purchase dollars, in the hope of further weakening the yen against the dollar and ‘bailing ‘ out the down struck export market. The US constitutes for around 20% of Japans goods and since the recession and decline in the value of the dollar Japanese exports have been down over 20%.
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The buck doesn’t stop there, the US doesn’t want to be left out, and enters QE2! The fed wants to pump some more money and reduce the cost of bonds uplift the economy and get the debt market back on tracks, and hopefully interest rates can see some momentum on the upside.
The question now lies in the capitalist free market, is it working, and is it fair. The free floating of currencies gives rise to speculators and opens doors for markets to collapse if not regulated properly. China still holds on to the old fashion of the Breton Woods system; keeping its fiscal policy as tight as possible, with strict capital controls and managing foreign inflow China seems to maintain stability in its currency and overall financial system.
It seems there is ample room for foreign exchange speculators to take advantage of the recent moves the swords and spears flying across the globe have caused. As soon as the Yen shorted their currency the yen hit 85.63 however the Chinese reacted immediately buy purchasing Japanese bonds and YEN shot back the 83 range. Japans purchase of dollars has continuously impacted the dollar against its major counterparts. EUR USD has been creeping up the 30 range bound and has continued to stay upbeat.
With ‘Bric’ nations holding their fortress how long till the so called currency war makes or breaks. Brazil and India have been restructuring internally, the USD role as a reserve currency is in question – survival of the fittest or survival of the cheapest!