January 4, 2013 Leave a comment
November 17, 2012 Leave a comment
The spot price of the Chinese yuan hit a record high of 6.2262 on Tuesday against the U.S dollar, marking an increase in buying power as economies in Europe and the USA continue to be clouded in uncertainty.
The yuan has been pegged to a basket of currencies since exchange rate reforms seven years ago on July 21, 2005. However, the yuan is still controlled by the Chinese government. It is allowed to rise or fall by 1% from the central parity rate each trading day.
As a result of the gradual movement, the US dollar has lost nearly 25% of its value against the yuan since the 2005 reforms.
The People’s Bank of China, the country’s central bank, set the central parity rate of the yuan against the U.S. dollar at 6.2891 on Tuesday, the highest since May 9, which allowed the currency to hit the new record.
November 14, 2012 Leave a comment
How interesting is this? The prime minister of Turkey, (described during the election campaign by the Obama administration as “sort of our ally”) has called for the IMF to fund loans using Gold rather than Dollars. First off, it should be understood that the world now see’s the IMF as a lending institution which does not really have the borrower’s “best interests” in mind. But more importantly, this is a call to abandon the Dollar. As you already know, many trade deals have been contracted over the last year where the local currencies of trading partners are used instead of Dollars.
This statement by Mr. Erdogan goes a step further, this is more or less sticking his finger in the face of the U.S.. The IMF was created at the Bretton Woods agreement by the West and the U.S. has a 17% vote which equates to veto power. Without doing a long history on the IMF (which has done “some” good things), suffice it to say that countries have come to understand that when they hear “We are from the IMF, we’re here to help you,” it is not necessarily a good thing. Many loans have been structured where the borrower pledged real and valuable raw materials for a loan in Dollars which had harsh terms, when these loans defaulted the “collateral” was lost. In many instances this was just a slight “twist” on the never pay model of the Dollar. Create Dollars, lend them out against real collateral, foreclose and scoop up the collateral.
In any case, the Prime Minister of Turkey is the first to call out the IMF (the U.S.) and suggests funding loans with Gold rather than freely created Dollars. He did this I presume because he knows that the IMF doesn’t have that much Gold in its coffers. Yes, they have (supposedly) over 2,000 tons but this amounts to something just over $100 billion. In today’s world, $100 billion unfortunately is chump change. The IMF, if it had to fund loans from their Gold (at today’s “sky high” prices), couldn’t even get Europe’s heart to flutter a beat were they to fall and hit the ground. To remain any sort of factor today, the IMF must have the ability to fund loans out of thin air or they become irrelevant.
November 5, 2012 Leave a comment
Once again we are seeing articles and research papers stating the Chinese renminbi (yuan) is about to replace the dollar as the global reserve currency.
Here is a working paper by Arvind Subramanian and Martin Kessler at the Peterson Institute of International Economics stating The Renminbi Bloc is Here: Asia Down, Rest of the World to Go?.
A country’s rise to economic dominance tends to be accompanied by its currency becoming a reference point, with other currencies tracking it implicitly or xplicitly. For a sample comprising emerging market economies, we show that in the last two years, the renminbi (RMB) has increasingly become a reference currency which we define as one which exhibits a high degree of co-movement (CMC) with other currencies. In East Asia, there is already a RMB bloc, because the RMB has become the dominant reference currency, eclipsing the dollar, which is a historic development.
The same authors present a case in the Financial Times article China’s currency rises in the US backyard.
East Asia is now a renminbi bloc because the currencies of seven out of 10 countries in the region – including South Korea, Indonesia, Taiwan, Malaysia, Singapore and Thailand – track the renminbi more closely than the US dollar. For example, since the middle of 2010, the Korean won and the renminbi have appreciated by similar amounts against the dollar. Only three economies in the group – Hong Kong, Vietnam and Mongolia – still have currencies following the dollar more closely than the renminbi.
October 30, 2012 Leave a comment
The Chinese currency has taken center stage in some of the economic policy debates leading up to the election. That is because of the perception that China is the source of all our jobs woes as their economy continues to grow at a rate four times as fast as ours. The theory is that by keeping their currency artificially “cheap” against the dollar, it encourages America to import more goods from China — while encouraging job growth there to make all those products.
But this discussion of the Chinese currency leads to some interesting revelations of our general ignorance about Chinese currency, and our trading relationship. For instance, what is the proper name of the Chinese currency?
You’ll hear two terms — and both are correct, technically. The renminbi is the name of the currency system, literally meaning “the people’s currency.” The yuan is the main unit of currency within the renminbi. There are also the jiao (1/10th of a yuan), and the fen (1/10th of a jiao).
This is similar to the British currency system, which is known as “Sterling,” while the unit of currency is called the British pound. In America, we refer to our currency system and the individual currency using the word “dollar.”
You will often see the renmimbi written as RMB — which is pronounced basically the same as the spelled out word. Since both renminbi and yuan can be used interchangeably, RMB is the easiest way to talk about the Chinese currency.
Where Americans get in trouble is with the pronunciation of the yuan. It is not pronounced like the “won” in won-ton soup!
Because of the tonal quality of the Chinese language, I am told that few Americans will ever pronounce it correctly. The easiest written explanation I have seen is this: “It sounds like the abbreviation for the United Nations. Saying “U.N.” without taking a pause between the “U” and the “N” sounds very similar to one way a native Mandarin speaker would say the name of the Chinese currency.”
October 9, 2012 Leave a comment
Understanding the euro’s failure and Triffin’s Paradox helps us understand why the dollar will rise significantly in the years ahead.
September 18, 2012 Leave a comment
Quantitative easing is really another word for currency wars. A weak U.S. currency puts continued pressure on the Japanese Yen, the Chinese Yuan, the South Korean Won, the Australian dollar and other currencies.
Cheap money also fuels speculation and this money quickly drifts into commodity markets and the ETFs that help propel commodity market speculation. This is inflationary for food prices.
The lower the U.S. dollar the greater the intensity of currency wars. The break below the key uptrend line on the Dollar Index chart was an early warning of the third round of quantitative easing (QE3). The most important question now is to use the chart to examine the potential downside limits of a QE3 weakened U.S. dollar.