World war. Cold war. Terror war. Star wars. Global FX wars! Welcome to the search for the new global supreme currency – or perhaps a basket of trade weighted indexed currencies.
Indeed, what began as the race to devalue has begun to irk those bearing the brunt of appreciation on the other side. That would be mostly countries jam-packed with dollar-denominated reserves.
As Master Yoda would say: The fear of loss is a path to intervention indeed. Use the force, they will.
The FT’s story on Friday at least suggested as much. As the FT reported:
Asian central banks intervened heavily in the currency markets on Thursday to stem the appreciation of their currencies against the US dollar amid fears that their exports could be losing ground against China.
And in a token gesture to further support the dollar, Ben Bernanke announced the Fed was ready to tighten monetary policy once the economy improved too. Comments that, at least temporarily, increased the appeal of US assets and lifted the dollar.
The point here is that greater ‘forces’ than usual are at play in the world of forex trading; the emergence, if you will, of the DEBTED SIDE vs the SURPLUS ALLIANCE.
Among those hinting of such divide was Bank of New York Mellon’s Neil Mellor. On Friday he wrote (our emphasis):
Indeed, nothing more readily highlights the strength of forces now at play in the foreign exchange market than the sheer scale of USD reserve accumulation by central banks resolute in their will to avert any decline in their export competitiveness in a world short of demand.
China’s reserves grew by USD 42 Bn in June — a smaller increase, admittedly, than the previous month’s rise of USD 80 Bn, but above the monthly average going back to 2007 of USD 35 Bn per month and double the average rate of accumulation since the start of 2001. Having grown by USD 5.5 Bn in September (up from USD 4.9 Bn in August), Brazil’s reserves are now growing at double the average monthly pace year-to-date, with the latest increase the largest recorded over that period. South Korea’s reserves increased nearly USD 9 Bn in October – roughly double the increase seen in August and the largest rise since May. Reserves have now grown by some USD 49 Bn since the end of February (when global markets took off) — a rise of nearly 20% of the present total.
Taiwan’s reserves rose USD 3.5 Bn in July – twice the rate of the monthly average increase since the start of the Millennium. Reserves have grown by roughly USD 27 Bn since the end of February — nearly 10% of their present total. Hong Kong saw its reserves grow USD 8.6 Bn in August which compares with the year-to-date monthly average of USD 5 Bn. Since the end of February, reserves have grown by USD 46.5 Bn — 20% of their current total.
India’s reserves grew by USD 3.5 Bn in September having grown by USD 4.7 Bn the previous month. Reserves have therefore grown by USD 30 Bn since the end of February, just over 10% of their current total.
Now, what would that dollar replacement everyone’s been talking about look like anyway?
Related links:
A little more intervention, a little less action – FT Alphaville
A commodity anchor or oil as money – FT Alphaville
Global currency it could happen – FT Alphaville
On your marks, get set, devalue - FT Alphaville