January 24, 2004
Dollar key issue at G7 meeting.
The Guardian
reviews the international status of the rapidly changing dollar in light of the upcoming meeting of the G7 meeting. It's not that an encouraging analysis. What's especially interesting is that China, the key player in the international currency markets now, is not even a member of the G7.
As a junior German economics minister noted earlier this week, an exchange rate of $1.25 is cause for concern, anything above $1.30 means real problems. France's trade minister, François Loos, is already complaining that French firms are having to slash their margins to offset the impact of the greenback's fall from grace. "It is obvious this situation cannot last forever."
... So where does that leave the G7? The Americans will favour doing nothing, the Japanese are already doing all they can, while the eurozone has a problem whatever it does. Meanwhile, a key player, China, is not even a member. The upshot is that whatever the G7 does will be wrong. So it should take the least damaging option and do nothing. That would disappoint the markets and depress the dollar. Better that, however, than raising expectations which cannot be fulfilled.
Well, if anything above $1.25 is "cause for concern" there is concern since it's holding steady above that now. And it came close to crossing the $1.30 barrier this week, hitting $1.29 briefly, before retreating. But it will hit that level soon, and I think will start closing in on $1.40. So far this is working in America's interests, but that is just short-term. Long-term it's disastrous. Basically Bush is keeping the economy up by selling America short. The Chinese and Japanese alone now hold over $2.5 trillion in American bonds.
But nobody is really addressing the implications of major further changes. The article points out that the Japanese are intervening very heavily in order to keep their exports to the US going, but that they have no "Plan B" in the event things get out of hand.
Last year Japan's central bank shelled out $187bn propping up the sagging dollar. The pace is quickening. Earlier this month it spent $38bn in one week alone.
... Just to add a little icing to the cake, all those dollars that Japan is buying on the foreign exchange market are being spent on US government bonds - keeping US interest rates down and helping to finance Mr Bush's spending plans. America's Democrats could be forgiven for wondering if the BoJ is staffed by Republicans.
For the Japanese, America's laissez-faire approach to the dollar must be worrying. Already there are those within the Japanese economic establishment who think the BoJ's policy of buying time for Japan's exporters by buying dollars may have to be reconsidered later this year.
The snag, as analysts at Dresdner Kleinwort Wasserstein noted yesterday, is that such comments "may suggest that Japan has not thought hard about plan B so far (ie, they intervene and hope it will get better at some point)".
Underlying the Japanese actions is the fact that their one-party state still has not really dealt with the serious problems in their economy, especially their enormous bad debts. And that they are simply relying on the US to bail them out, which can't work forever.
The article doesn't even mention Canada, but the rising loonie is also creating problems there. The Bank of Canada this week raised interest rates in order to slow down its rise, but they too can't fight history very long.
