Chinese State Councillor Calls for Diversification of Global Reserve Currency System

China has renewed its push for an alternative reserve currency at the G 8 Summit taking place in Italy. Chinese State Councillor Dai Bingguo did not mention the dollar specifically but called for global diversification of the global reserve currency system. In a statement read by foreign ministry spokesman Ma Zhaoxu Dai stated, “We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies’ exchange rates and promote a diversified and rational international reserve currency system.” Dai is attending the G8 summit in place of Chinese President Hu Jintao who returned to China to deal with political instability in the Xinjiang region.

British Prime Minister Brown Skeptical

British Prime Minister Gordon Brown was skeptical saying that any discussion of alternative reserve currencies would have to wait until global markets recover from the current recession. Brown also voiced concerns that changing reserve currencies at the present time could destabilize markets and that the focus should be on recovery from the recession. Brown stated, “In this present situation as we’re trying to get out of a deep recession, I don’t want to give the impression that there is some major change about to happen around the corner that suggests that the present arrangements are destabilized.”

China Leery of Undermining the Dollar

Currency exchange rates were largely unaffected by Dai’s statements and investors focused on positive US data and signals that Germany’s Bundesbank may purchase corporate bonds. In the past China has been leery of making any moves that could undermine the dollar. 70% of China’s foreign exchange reserves are dollar denominated making the dollar a very sensitive topic for China. In the past Chinese officials have suggested that the Special Drawing Right, which is an account unit used by the International Monetary Fund, is a viable alternative to the dollar as a reserve currency.

Dollar’s Status Secure For Now

For now the dollar’s status as a global reserve currency seems secure. There was no mention of the issue in a statement from the G8 and G5 nations.

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Recovery Doubts Raise Risk Aversion

Doubts about the speed of recovery from the lingering recession have dampened risk appetite as investors sell higher yielding assets and seek the safe havens of the US dollar and the yen. Both the dollar and yen gained broadly on Wednesday. The dollar was helped by comments by a Japanese official who said the leaders at the G 8 summit did not discuss the US dollar’s status as the world’s reserve currency during Wednesday’s talks on the global economy.

Investors Concerned About Chinese Political Instability

Chinese President Hu Jintao, who was to attend the conference returned home to deal with political unrest in Xinjiang region. Hu Jintao’s absence diminished speculation that any comments about reserve currencies would be added to communiqués from the G 8 summit. China has been in the forefront of nations calling for an alternative reserve currency. The political turbulence in China has some investors concerned. Boris Schlossberg of GFT Forex stated, “Part of the optimism earlier about a worldwide recovery was based on the assumption that China would be this locomotive of growth and keep the rebound going. As the political situation in China becomes problematic, it provides another reason for investors to sell any high-yielding currencies, benefiting the dollar and the yen.”

Investors Wait For Q2 Results

Investors are waiting for the second quarter corporate earnings report from the US. Poor results are expected to boost dollar and yen demand as investors seek safe haven investments. Investors will be paying particular attention to figures from financial institutions. Chris Turner of ING in London stated, “If bank earnings disappoint in any way or the S&P breaks crucial levels, traders will probably start reducing long positions in (high-risk currencies) and the dollar could be bid more.”

This week currency exchange rates will be affected by the G 8 summit taking place in Italy. The most recent communiqué from the group contained no mention of currencies.

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Conflicting Statements

Conflicting statements by Russian officials regarding the US dollar’s status as a reserve currency have confused currency markets during the past week. In Monday the Russian finance minister had backed the dollar as a reserve currency but comments Tuesday by Russian President Dmitry Medvedev questioned the dollar’s reserve status. Tuesday’s comments affected currency exchange rates and put downward pressure on the dollar.

Investor Concerns About US Fiscal Stability

Data showing growing US housing starts and a small rise in producer prices erased safe haven demand putting further pressure on the dollar. Russia’s comments dominated markets Tuesday. Omer Esiner of Travelex Global Business Payments stated, “Clearly the largest holders of U.S. Treasuries are increasingly nervous about the fiscal stability of the U.S. going forward. That said, I don’t think it’s to anybody’s interest to see a run on the dollar.”

BRIC Summit Fails to Address Dollar’s Reserve Status

Forex traders and investors have been watching the BRIC (Brazil, Russia, India and China) summit with great interest. The group represents the biggest emerging economies and is expected to discuss ways to reduce the dollar’s dominance in the global economy. Russian President Dmitry Medvedev said in advance of the summit, “The existing set of reserve currencies, including the U.S. dollar, have failed to perform their functions. We will not do without additional reserve currencies.” A statement issued by the BRIC group expressed the desire for a “diversified, stable and predictable currency system”

Risk Appetite Dominates

The euro to dollar traded 0.6% higher at $1.3876 and the yen to dollar rate was 1.3% lower at 96.56. The euro to yen rate fell by 0.7% and the Pound, Kiwi and Aussie dollars all fell by 1% against the yen. Currency exchange rates have been affected by the perception that the global economy is showing clear signs of recovery. Investors remain uncertain whether the dollar’s fall is over or will continue into the near future.

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Greenback Pressured

Recently the US dollar has been pressured by a variety of factors. Despite last Friday’s rally and the successful auction of $65 billion of US Treasuries investors remain concerned about the speed of US recovery and mounting US deficits. Russia’s challenge to the greenback as the world’s reserve currency and their announcement that Russia would not purchase more US debt put further pressure on the dollar.

Investors Remain Uncertain About US Recovery Speed

A week age the dollar got a boost from better than expected non farm payrolls data but the figures were not enough to sustain a long term rally for the dollar. Steven Englander of Barclays Capital stated, “The numbers that came in, while they were somewhat stronger than expected, weren’t really strong enough to be a game changer with respect to the U.S. economic outlook. It didn’t change the view on risks of where monetary and fiscal policy was headed.” Investors remain uncertain about the speed of US recovery efforts and some investors feel they are in uncharted territory where US fiscal and monetary policies are concerned. These factors are affecting the dollar exchange rate around the world in Forex markets.

Lots of Data Due This Week

Economic data due this week could have a drastic effect on currency exchange rates. On Monday the Treasury International Capital flows (TICS) for April will be released and on Tuesday the May Producer Price Index and May housing starts will be posted. Also due on Tuesday is the May industrial output and is expected to post a month to month decline of 0.9%. Wednesday the May Consumer Price Index will be released and is expected to show a month to month gain of 0.3%.

G 8 Meeting Watched by Investors

Investors are closely watching the G8 finance ministers meeting but currency exchange rates are not expected to be a topic of discussion. The slew of economic data expected this week should make it a very interesting week for Forex markets.

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Treasuries at Seven Month High

Smaller than expected US job losses helped the US dollar to recover some of the losses of the past two weeks. Also helping the dollar was the news that US treasuries rose to seven month highs spurring demand for the greenback. Smaller than expected job losses prompted investors to speculate that the Fed may raise rates in 2010 raising treasury yields.

Dollar’s Recent Fall Was Premature

Dollar exchange rates improved as forex investors noted the improving US economy. Lee Hardman of Bank of Tokyo-Mitsubishi UFJ stated, “If data shows the U.S. economy outperforming others, there may be potential for the dollar to strengthen further in the short term.” Many traders and investors believe that the dollar’s recent falls were premature. The DXY which measures the dollar against a basket of six major currencies rose above 81 affecting the dollar’s exchange rates. The DXY rose 1.6% late last week its highest since December.

Gordon Brown Faces Political Difficulties

The euro to dollar exchange rate fell 0.7% to $1.3870 and the euro to yen rate fell 0.7% to 136.81 yen. Political upsets in the UK affected the pound to dollar rate which 0.8% to $1.5837. British Prime Minister Gordon Brown is facing serious political challenges and support for his Labour Party is at its lowest level in nearly a century.

US Government to Auction 10 and 30 Year Treasuries This Week

Currency exchange rates will be affected by this week’s auction by the US government of 10 and 30 year treasuries. In Asia 2 and 10 year treasury yields hit their highest level since November 2008. Some investors worried that the rise in US treasuries could hurt US stocks triggering a rise in risk aversion prompting a buyback of the dollar.

Global currency exchange rates have been affected by the dollar’s comeback. It would appear that for once the dollar’s rise was not prompted by risk aversion.

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Yen Up Against 13 of 16 Major Currencies

http://www.interbank-fx.net/2009/06/yen-up-as-us-payrolls-prompt-safe-haven-demand/yen6/The Japanese yen rose against the S. African rand and the New Zealand dollars ahead of a US report that economists believe will show increasing unemployment in the US which could increase demand for safe haven assets. The yen also rose against 13 of the 16 major currencies. The increase came after remarks by US Federal Reserve Chairman Paul Volcker stating that US recovery is “years’ away. Shoichi Handa of SBI Liquidity Markets Co stated, “People are cutting short positions on the yen in a hurry before major economic events in the U.S., which may drive the market’s direction. If the ADP report today contains a negative surprise, the yen may be bought actively.”

Rising Risk Sentiment Driving Currency Exchange Rates

The yen to dollar exchange rate was at 95.61 while the euro to dollar rate is at $1.4320. Rising risk sentiment has been largely driving currency exchange rates for the past two weeks. Markets seemed to have shrugged off remarks by Volcker who stated that “truly massive fiscal and monetary stimulus is at work, a full recovery will be a matter of years” and that the US economy faces “an unimaginable budget deficit as far as one can see.”

Russia Suggests New Reserve Currency

Also affecting the dollar and currency exchange rates were earlier remarks by Dmitry Medvedev who suggested the need for new reserve currencies to replace the greenback. Susumu Kato of Calyon Securities stated, “Emerging markets are thinking that there are risks associated with the dollar, which will have some negative impact on the forex markets. This kind of talk will have negative implications for the dollar.”

Dollar at 2009 Low

The dollar vs. euro exchange rate is now at its lowest in 2009. Strong US housing sales data reinforced risk appetite and affected global currency exchange rates. Pending US home sales posted their biggest increase in 7 ½ years boosting confidence that the worst of the global recession is over and pressuring the dollar downward. Results of several European central bank meetings are not available yet but are bound to affect global currency exchange rates.

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Dollar Pressured by Rising Risk Appetite

Rising risk appetite has pressured the US dollar and is affecting global currency exchange rates across the board. The dollar has fallen to its lowest this year as investors pursue higher yielding investments and currencies. The dollar fell to a five month low and is well on its way to a monthly drop of 6%, the largest monthly decline since 1985. The US jobs report due Friday is expected to reinforce the view that the worst of the global downturn may be over. Kathy Lien of GFT Forex stated, “The tide is turning and we are beginning to see more signs of stability in the U.S. and global economy. We’re probably looking forward to more positive data from the U.S. economy, which will ease safe-haven flows and continue to drive the dollar lower.”

Bleak Future for the Dollar

The signs of improvement in the global economy are bad news for the dollar which is seen as a safe haven currency in troubled economic times along with the Japanese yen. Last Friday the euro to dollar exchange rate reached its highest this year at $1.4168. The pound gained 10% against the dollar in May, the largest monthly gain since 1985. Many currency strategists believe that the future of the dollar looks bleak in both the near term and long term.

Mounting US Deficits

Investor concerns about mounting US deficits have pressured the dollar and The US job report due this Friday is expected to show an unemployment rate of 9.2%. Fears of a possible credit downgrade for the US were resolved after Moody’s Investor Service said that the triple A rating of the US is secure. This week’s meetings of several banks in the Euro Zone, Canada and the UK are expected to affect currency exchange rates on global forex markets.

At the present time it doesn’t look good for the greenback and most currency experts expect this to continue as US deficits mount and unemployment surges.

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Euro Hits Five Month High

The euro to dollar rate hit $1.41 as the perception that the global recession is easing sent investors in search of higher yielding currencies. The greenback also fell against the Aussie and Kiwi dollars after South Korea announced that its state pension fund would purchase fewer US Treasuries. Concerns about skyrocketing deficits in the US also put pressure on the dollar and affected global currency exchange rates.

Rising US Deficits Pressure Dollar

Some currency experts believe that rising US deficits could affect the safe haven relationship of the US dollar. At present the US needs to fund a $1.8 trillion deficit which is putting a lot of pressure on the dollar. Alan Ruskin of RBS Greenwich Capital stated, “There’s a visceral concern about the debasement of the U.S. currency because the United States has a lot of debt to finance.” He also stated that the weak US dollar is driving the price of oil, which is priced in dollars, upwards leaving investors betting that “emerging markets will lead the way to recovery.”

Aussie and Kiwi Dollars Big Winners

Two big winners were the Australian and New Zealand dollars both of which rose against the US dollar. The US dollar is currently at an eight month low against both currencies as investors seek higher yielding assets. Global sticks are at their highest in 2009, affecting currency exchange rates and driving investors to riskier investments. Audrey Childe-Freeman of Brown Brothers Harriman said, “It’s driven by equities looking stronger and as a result of that the dollar is losing momentum… people are buying into the ‘worst is behind us’ story.”

Japan’s Industrial Production Rises

The yen to dollar rate rose as industrial production in the world’s second largest economy rose to the highest levels in 56 years. The yen to dollar exchange rate fell 1.2 percent to 95.77 yen. The yen to euro rate declined 1.5% as Japanese forex investors sought higher yielding investments abroad. Rising risk appetite has triggered a flight from dollar denominated assets and most currency specialists expect this to continue in the near future.

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US Housing Data Supports Safe Haven appeal of the Dollar

The dollar to euro rate rose after concerns of a US credit downgrade faded into the background and US housing data suggested that the housing market has yet to bottom out supported the safe haven appeal of the dollar. The pound to dollar rate rose to $1.60 a seven month high for the pond. The pound was bolstered by improvement in the British economy and banking sector.

Euro Hits $1.40

Last week the dollar fell on concerns that massive US deficits endangered the US’s AAA credit rating. The euro reached a multi month high of $1.40 but gains were pared by concerns about the German banking sector. Boris Schlossberg of GFT Forex stated that the recent gains of the euro “were driven not by any organic demand for euro but by fear of a possible U.S. downgrade. That’s why $1.40 has been such a cement ceiling for the euro — the fear trade has run out of gas.” In recent trading sessions the euro to dollar traded at $1.3885, a decline of 0.7%.

US Treasury Auction Well Received

Currency exchange rates were also affected by the well received US Treasury auction of US Treasury notes. $35 billion in new five-year Treasury notes were snapped up by investors and the $40 billion of two year notes drew solid demand from investors. Steven Butler of Scotia Capital in Toronto had this to say about the results of the auction, “The two-year auction was great, the five-year was OK, but we won’t know if things are OK or not until we get the 10-year, as the further you go out in duration, the more critical it is that the U.S. can get funding.” The US Treasury will auction 10 year notes in June.

Recovery a Long Way Off

Currency exchange rates have been affected by the perception that the worst of the global recession is over but many economists warn that recovery is a long way off with more bad news expected.

China Largest Holder of US Debt

Since the end of World War Two China has achieved astounding growth. China recovered from the devastation of the war and survived the excesses of the Maoist regime. China is now a modern industrialized nation with a thriving industrial sector. At present China is the largest holder of US debt. The actions of the Chinese government have had an affect on global currency exchange rates and now China is suggesting that its currency, the Yuan, could become a reserve currency.

Chinese Alarmed by Mounting US Debt

The Yuan has gained 21% against the US dollar since China dropped the Yuan’s fixed currency exchange rate in 2005. Despite the gains Chinese officials are alarmed at mounting US debt during the current global recession. For the Chinese the possibilities of a devalued US dollar seem very real. Last March China urges the g 20 nations to adopt a “super-sovereign reserve currency.”

Yuan Kept Artificially Low

Many believe that the Yuan has been kept artificially weak to give China a trade advantage. A Chinese official said that by 2020 the Yuan could make up 3% of global currency exchange reserves. In Hong Kong a pilot program will start using the Yuan to trade with companies in Guangdong province. China has arranged Yuan swap deals with six central banks totaling 650 billion Yuan ($95 billion USD)

Yuan Could Displace Japanese Yen

At present the idea of the Yuan as a reserve currency is mostly speculative but given China’s industrial power the idea should be taken seriously. Should the Yuan account for more than 3% of global reserves it would become possible for the Yuan to displace the Japanese Yen as fourth largest currency putting the Yuan behind the pound, euro, and the US dollar. Zhang Guangping, vice-head of the Shanghai branch of the China Banking Regulatory Commission stated, “We have the conditions to reach such a proportion.”

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