China, EU, US update

Today’s news:

European finance ministers pressed China to let its currency strengthen so their economy no longer bears the brunt of the drop in the U.S. dollar.

With the dollar plumbing record lows against the euro this month, the officials meeting yesterday in Brussels complained the European economy is shouldering a disproportionate share of the U.S. currency’s decline and urged the Chinese government to share the pain by allowing the yuan to rise more broadly.

While the yuan has gained 5 percent against the dollar this year, the currency has dropped 4 percent against the euro, hurting Europe’s exporters and forcing its trade account closer toward deficit.

Specifically: how many US dollars with a Yuan get you?

CNY/USD

And how many Euro will it get you?

CNY/EUR

The news a little over a month ago, now:

European Union finance ministers open two days of talks Monday to discuss the United States’ slowing economy, feeble dollar and massive current account deficit as major problems for the EU and the rest of the world.

Europe is starting to feel the bite as the U.S. dollar plummets, making French wine, Italian fashion and German cars expensive purchases for the EU’s main export market in the U.S.

Did anything change? Nope. China will deal with its under-valued currency when its needs dictate, not when other countries moan about it. It has a permanent UNSC seat, gained accession to the WTO, still keeps Taiwan out of the WHO – is there something China wants but doesn’t have, that we can give it? No? Then the under-valued Yuan is China’s bargaining chip, not ours.

Before we get too worked up, recall that the Euro is also appreciating against the US dollar, outside of China:

EUR/USD

Back at x-rates.com (the graphs are from Yahoo), the Euro has appreciated against the US dollar (January – November ’07) 12.13%. The Yuan has appreciated against the dollar by 4.68% – that leaves a 7.45 percentage point difference in performance – specifically a 7.45 percentage point advantage in the Euro over the Yuan. So what to expect? An appreciation in the Euro against the Yuan, of course. We get one: a 6.66% depreciation. That’s almost bang-on ((1.1213 – 1.0468)/1.1213 = 6.64%).

I don’t know that the EU is claiming that China is causing this by keeping its currency’s appreciation against the dollar lower than that of every other currency (ours is trading back below 90 cents – for now. The longer it stays down, the happier I’ll be).

The comlaint is, as before, than the US dollar is tanking against everything, while the Yuan is staying relatively low against it – meaning it is depreciating relative to all the currencies whose exchange rates are accurately reflecting the depreciation in the value of the US dollar. I suppose I just see it as less straightforward: amongst other things, who would have been borrowing Yuan to sell to lend to the US, in the first place? Now that the US rates are sliding while everyone else is, more sensibly (yet beyond the comprehension of Bernanke and Paulson) raising theres, who will be ditching dollars to lend to China?

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1 comment so far

  1. tekel on

    spot on. And as you note, Helicopter Ben is just putting off the inevitable. In the current market, the only way to strengthen the dollar is to raise rates. But Bennie seems willing to sacrifice the greenback on the altar of NYSE housing speculators. When he does, will anyone still be there to pay attention? As the Saudis, Iranians, and Argentinians have already indicated, OPEC is making preparations to move their commodity off our lousy currency and onto a stronger one. Another rate cut would be disastrous for the currency. A rate increase might destroy half the investment banks on wall street.

    Current Fed policy seems to be a fight over who’s going to look like the biggest ass when the US stock market crashes.


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