Just a reminder of what falling dollar currently means. Dollar depreciation is clearly part of what is needed to bring the US trade deficit down to a more sustainable level. But what is the case for China — with its $50 billion or so current account surplus and $150 billion or so annual reserve increase — to depreciate against the world as well?
General glut’s weblog nicely reviews today’s events.
And let me take a moment to give Thanksgiving kudos to the Financial Times for their recent coverage of the dollar story. The oped page has run solid pieces by Wolf and Cecchetti. Phil Coggan’s column on Monday said what a lot of what I was trying to say in my post about “large players in large markets” in a lot fewer words. The Wall Street Journal ran a Monday story emphasizing that Asia was accepting dollar depreciation (to a degree). The FT had a set of stories on Monday highlighting the difficulties created by the asymmetries in the way Asia is adjusting: the won and the yen have strengthened v. the dollar and the yuan has stayed fixed (i.e. the won and yen have strengthened v. the Chinese yuan). Hence friction between Korea’s finance ministry and central bank, and Japanese talk of intervention. The WSJ story was OK, but it failed to pick up on the tensions among the Asian countries in the way that the FT’s combined coverage did.
Today’s FT had a nice story on Russia’s desire to build up its euro reserves — evidence that at least some of smaller parts of the Bretton Woods system are tiring of the dollar reserve accumulation game.
All these articles tell part of the dollar’s story — the growing desire on one hand to diversify reserve holdings to protect against a dollar fall (or in the case of the People’s Bank of China, a desire not to have to add to its already massive dollar holdings to soak up massive capital inflows) and on the other hand worries that failure to intervene will siphon away growth by undermining exports.
The FT has long paid more attention to international economic issues than the WSJ, in part because of London’s currency markets. And in a world where at least half the financing for the US current account deficit is likely coming from official sources (i.e. central bank intervention), its greater emphasis on the “policy world” also is likely to pay real market dividends.