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Sunday, September 19, 2010

Currency Wars Continued

Things are heating up with China, as the US is disappointed in the lack of appreciation in the Renminbi vs. the US Dollar.  Per a recent article entitled "US-China clash over yuan escalates, risking superpower standoff" Tim Geithtner made the following statement to congress:
“The pace of appreciation has been to slow. The undervalued renminbi helps China’s export sector. It encourages out-sourcing of production and jobs from the United States. By continuing a rigid exchange rate, China is impeding the adjustments needed to secure sustainable global growth,”
Japan intervened in the forex markets this week in response to a stronger Yen vs. the US dollar thanks to two events; the US devaluation of the dollar and China's purchasing of the Yen (creating stronger demand for the Yen, thereby causing the Yen to rise).  Japan bought the US Dollar and the Euro selling off the Yen, to cause its currency to devalue considerably ( in a very small period of time).  The US House Ways and Means committee calls this move "very disturbing".  Geithtner continues:
“The US trade deficit with China is widening, yet the Chinese are still accumulating reserves at remarkable rate, beyond their needs. They know that growth in China’s coastal provinces is their passport to political stability, but this is incompatible with US political stability,”
Wow, China is making moves that is not in our interests, who would have thunk it.  Well not all the blame can sit with them, we did put policies in place to allow US manufacturing jobs to go overseas with no recourse and tried to become a mostly service economy ("you want fries with that").  Last I looked we are still the major consumers of products and we could have put tariffs in place that helped even out the playing field.  As we have farmed out most of our agriculture, manufacturing and such we put ourselves in a position where if we try to put tariffs in place, to even the playing field, we could get cut off on imports.  We need to strengthen our Agricultural and manufacturing base to make America great again (You know create jobs, produce food for the US and create real wealth for hard working Americans).

China, Russia and some other developed countries have already announced support for an alternative reserve currency and a recent article called "Will Europe Join in Promoting the SDR as the Global Reserve Currency?" points out that China, Russia and others would support an reformulated SDR with a broader representation of currencies, gold and silver.  Now, European countries are are subtly rallying to support this effort as well.  This is something that the US and the UK is fighting and trying to delay for obvious reasons.

All this activity is really going to make for some interesting forex markets.  For anyone investing in the forex markets these issues are going to cloud technicals in the forex markets and creating a lot of volatility making it much tougher for investors to make sound decisions.  Your either going to get wiped out of your account within hours or obtain considerable gains in very short periods of time (re. Japanese intervention).

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