The Return of the Currency Wars

[LeveragedBuyout]

I'm not sure that would strengthen your position. The gist of your argument is that the inherent strengths of the USA propel the USD to global reserve currency status (this is the causal relationship, according to you) and cause its value to appreciate. The weakness of the Eurozone would seem to cast doubt on this position, because it suggests that appreciation is caused by the weaknesses or policies of others, and not your inherent strengths. Note that around the time QEIII was started, Japan also began their own ill-fated monetary easing project, which explains USD appreciation since 2012 to an extent.

Anyway, I stand by my statement that recent appreciation is caused by (rumors of) tapering. By recent, I don't mean the secular trend suggested by the WSJ graph that charts the USD's value over the past few years, but more the appreciation in the latest months. See this chart, and how it shows the USD's rapid appreciation against the XDR since July.
XE.com - USD/XDR Chart

At the end of the day, strength is a relative term. It doesn't matter if the US is objectively doing well, or if Europe is simply doing worse--in either case, we are relatively stronger, and thus attract capital looking for safety. USD strength is driven by simple demand: when there is high demand for USD, the dollar appreciates, and vice versa. Whether that's because our economy is relatively stronger, or relatively more welcoming of FDI, or has relatively higher interest rates, it will drive the dollar higher. QE3 (the interest rate component) is just one of several factors that drives demand for USD, so I would still dispute that the tapering of QE3 "completely" explains recent dollar strength.

Indeed, forecasters are starting to project objective improvement in the US economy going forward.

U.S. Forecast | The Conference Board

Econ Forecast - The Wall Street Journal - WSJ.com

By the way, can anyone recommend a good image hosting site for me to upload screenshots and/or my own charts? Preferably that doesn't require me to sign up for an account.

 

[alaungphaya]

1. No. A high value currency penalizes manufacturers. The increased cost of energy is negligible (in the long-term) in the face of increased demand for manufactured goods. If we were merely an exporter of raw materials (esp. oil), then yes, we would want to appreciate the value of our currency because of the price inelasticity of raw material/energy imports. But we are resolutely a manufacturing nation.
2. To me, a floating, liberalized currency only has the advantage of the reassuring foreign holders that they can liquidate/exchange it at will, so they don't mind receiving it and are consequently more likely to buy Chinese goods. Otherwise, the disadvantages (X-rate unpredictability, speculators hoarding it and inflating its value) are great too. The Asian financial crisis of 1998 was an important lesson for the region.

China has recently focused on bilateral "currency swaps" - limited liberalization for the express purpose of encouraging others to buy Chinese goods. This is the way to go for us.

Fair enough. Another point I want to ask is, due to China loosening its capital controls, what do the newly wealthy middle class think about currency liberalisation? Is there political pressure for the government to let go of the reins and let the RMB appreciate?

 

[Raphael]

At the end of the day, strength is a relative term. It doesn't matter if the US is objectively doing well, or if Europe is simply doing worse--in either case, we are relatively stronger, and thus attract capital looking for safety. USD strength is driven by simple demand: when there is high demand for USD, the dollar appreciates, and vice versa. Whether that's because our economy is relatively stronger, or relatively more welcoming to FDI, or has relatively higher interest rates, it will drive the dollar higher. QE3 (the interest rate component) is just one of several factors that drives demand for USD, so I would still dispute that the tapering of QE3 "completely" explains recent dollar strength.

Indeed, forecasters are starting to project objective improvement in the US economy going forward.

U.S. Forecast | The Conference Board

Econ Forecast - The Wall Street Journal - WSJ.com

By the way, can anyone recommend a good image hosting site for me to upload screenshots and/or my own charts? Preferably that doesn't require me to sign up for an account.

Good explanation. And just to add, while I'm obviously not privy to the inner discussions of the PBoC, I think there is very little desire for the RMB to usurp the USD's reserve status. There's a reason we hold $1.3 trillion in US treasury bonds. But the mere absence of ill intention (from us) doesn't mean the USD can hold its position in the long term. The "relative strength" you talk about is simply that - if the Eurozone recovers, you cease to be "relatively stronger".

Anyway, imgur is the best free image hoster, and requires no registration.

Fair enough. Another point I want to ask is, due to China loosening its capital controls, what do the newly wealthy middle class think about currency liberalisation? Is there political pressure for the government to let go of the reins and let the RMB appreciate?

Currency liberalisation and exchange rates is less a topic of popular discourse in China than in other countries. China is a large and self-contained country. The average Chinese mostly buys Chinese products, doesn't travel overseas much, and is thus fairly insulated from the effects of a weak currency. Most Chinese take public transportation (heavily subsidized) instead of driving, which relieves the most obvious pressure point (energy imports) for where they might feel the pinch of a weak currency. Added to that, the value of the RMB might be below expectations or desires, but it's very stable. So no, the pressure is negligible.

 

[LeveragedBuyout]

Good explanation. And just to add, while I'm obviously not privy to the inner discussions of the PBoC, I think there is very little desire for the RMB to usurp the USD's reserve status. There's a reason we hold $1.3 trillion in US treasury bonds. But the mere absence of ill intention (from us) doesn't mean the USD can hold its position in the long term. The "relative strength" you talk about is simply that - if the Eurozone recovers, you cease to be "relatively stronger".

Anyway, imgur is the best free image hoster, and requires no registration.

I agree, the RMB will be the reserve currency, if China allows it to. It's inevitable.

 

[tonyget]

One does not break the USD reserve status to achieve hegemony; one achieves hegemony to break the USD reserve status.

@LeveragedBuyout

Can the US remain hegemony when dollar lose it's reserve status ?

 

[LeveragedBuyout]

@LeveragedBuyout

Can the US remain hegemony when dollar lose it's reserve status ?

I don't understand the question. It will already no longer be the hegemon by the time it loses dollar status, per my previous answer.

 

[tonyget]

I don't understand the question. It will already no longer be the hegemon by the time it loses dollar status, per my previous answer.

What I meant was, is it possible for a country to be hegemony without it's currency be the reserve currency ?

 

[senheiser]

Russian Ruble at new low

http://online.wsj.com/articles/ruble-hits-new-low-against-dollar-1410768591

good for russia it means russian exports will be cheaper always funny how western propaganda works

japan, eurozone = currency war

Russia = sanctions

 

[LeveragedBuyout]

What I meant was, is it possible for a country to be hegemony without it's currency be the reserve currency ?

That's a good question, and merits some study. I think there's a difference between a global hegemon and a regional hegemon in this case. For the former, probably not, because it requires economic predominance to be the global hegemon, and by simple virtue of trade and financial flows, the currency of the hegemon will become the most used currency. That's what I was getting at in saying that the reserve status is a consequence, and not a cause, of hegemony.

For the regional hegemon, I suppose it could be possible, but it's unlikely. For example, the existence of Germany as the largest and strongest economy within a weak EU doesn't prevent France or the UK from exerting significant influence on both the member states of the EU, and neighboring states of the EU. It's easy to label Germany as the hegemon of Europe, but it's unclear if that's entirely accurate, given Germany's voluntary de-emphasis on military and foreign influence. That clears the way for France and the UK to step into a role that is normally reserved for the economic hegemon, but does that qualify France or the UK as regional hegemons?

On the other hand, "global hegemon" is probably a historical aberration that may not be repeated with the passing of the US. WWII produced two superpowers out of the ashes of war, and it was only the collapse of the USSR that elevated the US further to "global hegemon" (alternatively, "hyperpower"), a scenario that is unlikely to repeat itself. Even if China continues to grow at a straight-line rate for decades to come, it is hard to envision a future where China occupies a relative position of power similar to the one the US found itself in after WWII. Therefore, we may not see a repeat of the "global hegemon" phenomenon, and instead revert to the "multipolar world" that so many here hope to see, and which has been the rule for much of history.

In summary... I don't see how it's possible for a hegemon to sustain itself as such without preserving the reserve currency status. Can you think of a precedent for such a scenario?

 

[Hamartia Antidote]

good for russia it means russian exports will be cheaper always funny how western propaganda works

japan, eurozone = currency war

Russia = sanctions

Yes, it's going to make your oil, gas, weapons, heavy machinery, and natural resources cheaper.

But can you name 10 different Russian Brand products sold across the world right now that the average consumer will go "oh cool the price is lower so I'll buy it now instead of the usual local/imported product".

 

[senheiser]

Yes, it's going to make your oil, gas, weapons, heavy machinery, and natural resources cheaper.

But can you name 10 different Russian Brand products sold across the world right now that the average consumer will go "oh cool the price is lower so I'll buy it now instead of the usual local/imported product".

not true gas and oil is traded in dollars this will increase revenue as its cheaper to buy in russia with this money that is more worth. Russia exports various products like fertilizer for example.

 

[Hamartia Antidote]

Russia exports various products like fertilizer for example.

True, you do export a lot of crap.

 

[Audio]

Russia exports various products like fertilizer for example.

You just walked right into that one.

given Germany's voluntary de-emphasis on foreign influence.

You're somewhat wrong on this here. German influence works under the table.

 

[LeveragedBuyout]

You just walked right into that one.



You're somewhat wrong on this here. German influence works under the table.

Please elaborate on the conflict between "voluntary de-emphasis" and "under the table." I'm not smart enough to see the difference.

 

[Audio]

Please elaborate on the conflict between "voluntary de-emphasis" and "under the table." I'm not smart enough to see the difference.

I read "voluntary de-emphasis on military and foreign influence" as isolationism.