Tuesday, February 12, 2013

Currency Wars

The renminbi fell slightly against the dollar in China on Friday. The yuan, as the currency is informally known, began the day up over the greenback but weakened as trading progressed.

The reason for the afternoon decline? Chinese enterprises entered the market and bought the American currency in large amounts late in the day. “It just seems so odd that companies would choose this particular time to buy such big amounts of dollars,” an unnamed Shanghai trader in a local bank told the Wall Street Journal.
Market participants naturally suspect that the People’s Bank of China, the central bank, was behind the surprising accumulation of greenbacks. Traders also believe that recent dollar purchases by China’s state banks are really on behalf of the central bank.

Since early December, the meddling of the People’s Bank in the currency market has been evident but not, in the words of Reuters, “overwhelming.” Stephen Green, the well-known analyst from Standard Chartered, estimates that the intervention last quarter was “to the net tune of $34 billion.”

Central bank operations do not have to be large to be effective, however. Traders, despite strong corporate demand for the renminbi, saw the signals from Beijing and have reined themselves in.

China’s dollar-buying is understandable in the context of the downward movement of the yen, which has fallen against every major currency in recent months. It has, this year, lost 7.09% of its value against the dollar and fallen 8.57% against the euro. Newly installed Prime Minister Shinzo Abe has made the depreciation of the currency one of the centerpieces of his controversial economic program, so there are expectations of aggressive tactics from the Bank of Japan, especially now that Masaaki Shirakawa announced on Tuesday his intention to step down early as its governor.

“I can’t recall a move in currencies that has been so deliberate and so linear without any apparent real change in fundamentals,” said ANZ’s Richard Yetsenga on CNBC Asia’s “Squawk Box.” “The yen’s move has largely been on the basis of an apparent move in government policy and the market is front-running that.”

Of course, everyone has noticed Tokyo’s new currency policy. Europe and South Korea in particular have complained, but China by and large has not.

Why complain when you can engineer the value of your currency? Beijing has been manipulating the yuan downward, and Seoul has been fiddling with the won. The South Korean currency is down 2.53% against the dollar since the end of December. At the same time, the Taiwan dollar is off 2.37% against the greenback. From all outward appearances, countries in Asia are now engaged in competitive devaluations.

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