On one level, this was just a white lie for public consumption. But there was more to it than that. The strong dollar is not all downside. In keeping their currencies depressed, both China and Japan are forced to buy dollar assets, thus helping to support the burgeoning US budget deficit. The effect is also to keep US inflation and interest rates low and consumption high. Far from damaging the US economy through the loss of manufacturing jobs to China, there is a respectable case for arguing that a strong dollar continues to be a boon to both regions.

Meanwhile, usable foreign exchange holdings rose to 37.04 billion dollars, up 2.69 billion dollars from the month before.

The two currencies Mr Snow most has in mind are the Japanese yen and the Chinese renminbi, neither of which are wholly subject to market forces as things stand. The Chinese currency is pegged at a relatively low level against the US dollar, to the disadvantage of US and European manufacturers alike. Meanwhile, the Bank of Japan has until recently been selling yen at record levels in an attempt to keep the Japanese currency depressed against the dollar and underpin Japan’s still fragile economic recovery.

The US runs a massive and growing trade deficit with China and Japan. Meanwhile, China has overtaken the US as Japan’s biggest export market, particularly for capital goods. Another way of looking at the problem is that most of China’s growing export success story goes to America but most of its imports of capital equipment to support that growth come from Japan. To keep the dynamic of the process going, both the yen and the renminbi have to be kept low against the dollar. Europe is caught in the crossfire. The biggest competitor to Japan in capital goods is Germany, which with the euro now relatively strong against the dollar, finds itself outpriced in the growth markets of Asia.

posted by Administrator at 10:07 am & filed under Currency markets |