After all the fire and fury in the currency markets yesterday, things are much calmer today. I have the impression that everyone is convinced that the dollar needs to come down substantially, but that nobody believes it is actually going to happen. Chinese reticence, Japanese dithering, and euroland alarm are amongst the various reasons one could think of. For the dollar really to come down, everyone has to believe that it is going to happen, and accept it. I'm not sure we're there yet, and when we do get there I'm not sure the consequences will be as benign as many imagine.
Meanwhile over at Morgan Stanley, Andy Xie doesn't seem too convinced:
Many investors remain wary that the Bank of Japan could restart yen-weakening currency market interventions that would boost the dollar. "We think the BoJ will definitely be back. If they need to intervene, they need to do it this week," said Robert Sinche, global head of currency strategy at Citibank in New York. "People are very hesitant to be long dollars ever since the G7. After such a break (below) key levels on dollar/yen, the only way we could get back to dollar-buying mode would be some BoJ activity somewhere near the 110 yen area," said David Leaver, senior trader with Gain Capital in Warren, New Jersey. Markets seem to view the U.S. endorsement of the G7 statement as an apparent abandonment of the U.S. strong dollar policy, many analysts said. Japan is concerned that a rapid rise in the yen could jeopardize the country's tentative export-led recovery and has spent roughly nine trillion yen ($70 billion) in yen-weakening currency intervention already this year. Comments from Japan's top financial diplomat, Zembei Mizoguchi, that the yen's rise was too rapid did inject some wariness into the market.Mizoguchi, attending IMF meetings in Dubai, said the yen's recent surge had been partly due to speculative buying and Japan would act as needed to stem disruptive exchange rate moves. Some analysts characterized Mizoguchi's talk as "verbal intervention" that has had only limited impact. "The verbal intervention is part of what brought (the dollar) back up above 111 (yen)," said Greg Anderson, senior foreign exchange strategist at ABN Amro in Chicago. "Until the Japanese actually intervene, dollar/yen is going to continue to see the downside."
I can't believe it. Someone actually mentioned demographics!
The G-7 communiqué over the weekend was not another Plaza Accord. In my view, it was more the outcome of a group of the world’s wealthiest nations trying to beat down a large, fast-growing but still poor China without China being present. A new world order is only likely to work with China’s consent.
The United States, Japan and some European countries are focusing on exchange rates to explain their own economic problems. This is confusing the symptom with the cause. The global imbalance is due to differences in savings rates. Savings imbalance and competitiveness are two distinct issues. The situation today is different from that in the 1980s.
Intervention in currency markets is a necessary part of the adjustment process. Mature economies in Asia still have high savings rates but cannot invest as much as previously, as they have lost competitiveness to China. Without intervention in the currency markets, the savings surpluses will cause excessively strong currencies and serious deflation.
Currency intervention allows these economies to adjust their savings rates in an environment without massive deflation. This is ultimately good for global economic stability. As these economies decrease their investment, their savings rates decline with lower capital income............Several mature economies in Asia cannot invest as much as previously as they have lost competitiveness to China. However, their savings rates, determined by demographics and existing capital structures, cannot suddenly decline to reflect the new reality. These economies, therefore, experience capital surpluses...........Waning investment and slow economic growth are lowering savings rates in mature Asian economies. The gross national savings rate in Japan has decreased by 3.9 percentage points, in Korea by 5.6 and in Taiwan by 2.7 in the past three years from 1990s levels. Their savings surpluses are still large because their investment-to-GDP ratios continue to decline. Before the end of the decade, Asia’s savings surpluses should have largely disappeared, in my view. By that time, global rebalancing could have been achieved through slow growth and some deflation among Asia’s mature economies.
Source: Morgan Stanley Global Economic Forum