Expansion of the money supply and interventions in the foreign exchange market: China, Japan and the USA lead the fight for world shares of the market increasingly about her currencies. How investors can make with it profits.
Long he was the beating boy of the foreign exchange markets: In June sank the euro on a low-pressure area of 1.20 US dollars. Now he is resurrected like phoenix from the cinder. During the past four months the communal currency has increased by about 17 percent on 1.39 dollars. Also compared with the Chinese yuan and the Japanese yen the course has clearly risen. For the high-altitude flight of the euro there are many reasons. In Germany and other EU states the economic situation has recovered unexpectedly hard. The persistent stagnation in the USA has not expanded up to now to Europe. Moreover, fears have scattered first of all, the debt crisis of Greece can sprinkle the monetary union.
However, the most important cause for the eurostrength consists in the fact that three strongest economic powers of the world – the USA, China and Japan – have apparently conspired against the eurozone. All three countries pursue the aim to hold the value of own currency very low. Besides, they differ merely in her methods. The purpose of the measures is always the same: A weak currency reduces in price the goods produced in the country at the world markets; this promises rising exportations and sure jobs. However, as a countermove the currencies of other countries go up, so that there the exportations sink and the employment is endangered. Topically above all the eurozone is concerned.
Does a devaluation race which could overthrow the financial markets once more in a heavy crisis threaten? This fears at least Dominique Strauss-Kahn, the boss of the international monetary fund (IWF): It spreads the idea to use devaluations as a „weapon of the politics“. Minister of Finance of Brazil Guido Mantega speaks even of a „worldwide currency war“. Also politicians of Europe are alarmed. One must speak as quickly as possible of a „currency order with realistic exchange rates“, demands Federal Chancellor Angela Merkel. And president of France Nicolas Sarkozy wants to put talks about a new currency order completely on top on the agenda of the G?20 whose chair he takes in November.
Experts advise, admittedly to look at the things soberly. „We can ascertain a specific manipulation of exchange rates up to now only in isolated cases“, Jörn Quitzau, economist points out at the Berenberg bank. „One may worry not all states about a comb“, also believes Armin Mekelburg, foreign currency expert with the Unicredit. „The basic danger of a devaluation race is not to be dismissed, admittedly.“ For this there are clues only too well. For the first time for six years central bank of Japan has bought recently massively dollar to strengthen the US foreign exchange and to weaken at the same time the yen. Moreover, the central bank the last week has lowered the leading interest upon zero. Now commercial banks of Japan free of charge and almost unrestrictedly can supply themselves with liquidity. Already before Japan the central bank of Switzerland has intervened in the foreign exchange markets to stop the revaluation of the franc. However, in the end, the currency guardians could not assert themselves against the forces of the market.
However, as the worst sinner in the monetary policy is valid China. The yuan is not freely still tradeable. The authorities settle the course of the currency within a narrow prize tape. Economy professor Fred Bergsten, boss of the Peterson institute in Washington, demands, the yuan must be revalued compared with the dollar about 20 to 25 percent. With it could originate in the USA half a million new jobs. The yuan weakness has, admittedly, system. „The Chinese economic model is based on low exchange rates“, explains Berenberg expert Quitzau. The Chinese flood the world markets with toys, clothing and consumer electronics which they sell above all about the price, not about the quality. Above all the USA which must accept in 2010 probably a deficit of 250 milliard dollars in trade with China suffer from the flood of the cheap exports.
Though government of China promises over and over again to flexibilize the exchange rates. However, the yuan is revalued only in the smallest steps – since June the course rose compared with the dollar just once by two percent. Now the Americans with her patience are at the end. On the 29th of September the House of Representatives dismissed a law which intends penal duties against countries which get unfair commercial advantages with the manipulation of her currencies. However, the law must still pass the senate.
Admittedly, the Americans also do something to hold the value of her currency very low. Though the US government does not intervene immediately in the foreign exchange market. However, she looks with quiet goodwill as the US central bank of (Fed) expands the money supply after forces and weakens with it the dollar. Experts are procured. „Should get involved the Federal reserve on the course of an other aggressive quantitative relaxation, this one destabilising collapse of the dollar can cause“, the institutes of warn Internationally Finance (IIF) in which more than 400 banks and other financial institutions are represented.
The example points: With a global devaluation race there are generally no winners, but only losers. If the exchange rates sink, not only the exports go down; at the same time the introduced goods become more expensive. „The same people who profit as an employee from a devaluation suffer from it as consumers“, chief economist Jörg Krämer of the Commerzbank states. Anyway hold the favorable effects which a devaluation on export, growth and employment has seldom long before. „In many cases these effects have already worn themselves out after one year“, says shopkeeper. Since to the balance of the raised the price of import goods the employees demand higher wages. However, with it the inflation which has unfavorable effects on the whole national economy is generated.
Because a devaluation is effective timewise only restricted, the governments easily get in temptation to use this instrument over and over again. Then the other countries react accordingly. A vicious circle starts. Finally, the states reach to penal duties and other means to protect her portion in world trade. At the same time the central banks with her low interest rate policy release a flight of capital of the biggest style. Already in 2009 581 milliard dollars from the old industrial countries ran off in the Emerging Markets where higher yields lure. This year the capital stream will rise according to IIF on 834 milliard dollars. Subsequently the currencies of many threshold countries come under revaluation pressure. Brazil has decided just turnover of capital restrictions to dam the influx. Other states could follow, warns the IIF.
The European central bank refuses strictly to intervene in the foreign exchange market
The global devaluation race threatens to cause a new protectionism which could lead at the end to the breakdown of free world trade and turnover of capital. Admittedly, there is reasonable hope that it comes not so far. Since one of the most important central banks does not take part in the bad play around the weakest currency: The European central bank refuses strictly to intervene in the foreign exchange market. This entails of course that the euro is forced to the high-altitude flight. Experts assume from the fact that the communal currency remains relatively strong for foreseeable time. Could an other eurorevaluation brake the economic situation which has started in Germany just hard? The impulses for the impetus come for the most part from the export. Economists hold the negative results, however, for restricted. Finally, the euro one more little piece is removed from the record brands of the past years.„ The pain threshold lies with a course of about 1.50 dollars“, says Unicredit expert castle Mekel.
International currencies – escape in raw materials and security
Even if the euro has become stronger to the dollar again – on annual view many currencies have still taken down him. Beside the escape currencies yen and Swiss franc the foreign currency of countries rich in raw material has also strongly revalued.
Foreign exchange market interventions – model Plaza Accord
To prevent a global devaluation race, the leading industrial countries and threshold countries should close a new monetary agreement, demands the international bank organisation IIF. Model could be of the Plaza Accord on which in 1985 five western industrial nations agreed. At that time as today the Chinese yuan was strongly undervalued the Japanese yen compared with the US dollar. In a conference in the New York Plaza hotel the USA came to an agreement, Japan, France, Great Britain and Germany to bring the exchange rates again in the plumb line with co-ordinated interventions on the foreign exchange markets. Today, however, such a concerted action would be considerably more difficult in view of the a lot of higher volatility of the financial markets.
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