Like many others, I expected that Asian currencies – notably emerging Asian currencies – would appreciate against both the euro and the dollar this year. That hasn’t happened.
Sure, the RMB has moved up a bit against the dollar, but not as much as euro. Or the pound. Both the euro and its high-carry cousin on the other side of the Channel are on course to end the year stronger against China and India (and flat v. Korea and Thailand, both of which have allowed their currencies to appreciate) as well as Japan and the US.
The euro’s strong performance against the dollar in 2006 can be chalked up to shifts in the relative pace of European and US growth (and shifts in expectations about the path of European rates). Per capita Eurozone growth is likely to exceed US growth this year.
But it is hard too see how growth differentials explain the Euro’s appreciation against the RMB …
Since China now exports about as much to Europe as to the US, I rather suspect the RMB will end up depreciating this year on a trade weighted basis. That is hardly what China needs to wean its economy off exports.
Four other observations:
One. The dollar’s slide against the euro looks to be a consequence of slower US growth, not the cause of it. A weaker dollar combined with falling US long-term rates is not recipe for a hard landing driven by the unwillingness of foreigners to finance the US. For that to happen, a falling dollar needs to be combined with rising US long-term rates.