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On Monday, February 07, 2011, US Treasury secretary, Tim Geithner met with Brazilian President Dilma Rousseff in Brasilia, Brazil. He was accompanied by Under secretary for International Affairs Lael Brainard and US Ambassador to Brazil Tom Shannon.
Currency Wars: The real rate of China's currency - - the renminbi/ yuan
(yuan; Mandarin for unit; renminbi; Mandarin for people's currency) against the
US dollar is now rising at an annual rate of 10 to 12%.
C. Fred Bergsten, the director of the Peterson Institute for International
Economics, a Washington DC think-tank, who was a Treasury official during the
Carter administration, said in
published this week, that if the current tends continues, it would complete the
needed correction of 20 to 30%, and official US reactions suggest that
assurances that the adjustment will continue may have been received. He said the
movement appears to derive from effective US pressure, increasing expressions of
concern about the issue from other countries (especially a number of major
emerging markets) and, most importantly, changes in economic conditions in China
Last October Bergsten proposed the
introduction of a new policy instrument:
countervailing currency intervention.
When China or Japan buy dollars to keep
their currency substantially
undervalued, the United States should
sell an equivalent amount of dollars to
push back. The IMF should authorize such
intervention when necessary to
discipline countries that are violating
their obligations by engaging in
Wednesday, the economist said that
"the nominal exchange rate of the renminbi has now appreciated by about
3.7% against the dollar since
China announced last June that it would
let the rate start moving upward again.
During this same period, Chinese
inflation has accelerated and is running
substantially above that of the United
States (which is less than 2%)."
He added: "Different indexes
produce different results and all of the
official numbers probably underestimate
the actual pace of upward price
movements in that country. It is safe to
say, however, that the real exchange
rate of the renminbi has risen by at
least 5% against the dollar over
the past seven months, producing a real
appreciation against the dollar at an
annual rate of at least 10% and
perhaps as much as 12%."
The term "currency war" was coined last September by Guido Mantega, Brazil's finance minister and in the same month, Finfacts
reported on the devastating impact of Chinese shoe imports on the Brazilian
The Brazilian government plans to
expand anti-dumping measures to
several Asian countries claiming that they are using China as a front for exports to
The new administration of President Dilma
Rousseff is fighting back against a loss of competitiveness triggered by an
appreciating real, which has risen 38% against the US dollar in just two years.
The trade surplus is expected to plunge to $8bn this year and
$5bn in 2012 from $20bn in 2010 - - its lowest in eight
In São Paulo on Monday this
week, US treasury secretary, Tim Geithner, said:
"Brazil is seeing a surge in capital inflows. This is happening for two reasons.
First, investors around the world see Brazil growing at a faster pace and
offering higher rates of return relative to other major economies. But these
flows have been magnified by the policies of other emerging economies that are
trying to sustain undervalued currencies, with tightly controlled exchange rate
regimes. Brazil and other emerging economies with flexible exchange rates
and open capital markets have born a disproportionate share of both the benefits
and burdens of these capital flows.
Managing capital flows in such circumstances is not an easy task. The fact is
it’s very hard to use monetary policy tools alone to curtail inflation without
putting more upward pressure on the exchange rate. Countries facing an outsized
burden of adjustment and overvalued flexible exchange rates may need to adopt
carefully designed macro-prudential measures, as a complement to fiscal reforms.
But Brazil and other emerging markets cannot address these challenges by their
own policy choices alone. They need - - just as we do - - the support from the
policy choices of other major economies. As countries with large surpluses act
to strengthen domestic demand in their economies, open their capital markets and
allow their currencies to reflect fundamentals, we will see more balance in the
flow of capital, less upward pressure on Brazil’s currency, and more robust
growth in Brazil’s exports, especially manufacturing exports."
Lim Say Boon, chief investment officer at DBS Bank, believes demand for yuan denominated assets will increase. He tells CNBC's Martin Soong and Karen Tso that the Chinese currency is firmly on its way to being regarded as a credible store of value:
Nicholas Hastings says in
an article in a Wall Street Journal blog, that in the past, as central banks have accumulated dollar reserves from their
intervention to keep their currencies down, they have often diversified these
holdings into the euro. In fact, diversification has often been a big force in
determining the direction of major currencies.
Hastings adds: "With sovereign-debt concerns still hanging over the Eurozone, with the
succession of the European Central Bank presidency now in doubt and with talk of
Eurozone stagflation on the rise, the economic recovery in the US is starting
to look more attractive and the dollar itself a better reserve option after all."