The International Monetary Fund said traders are probably using the dollar to fund “carry trades” across the world and the currency may still be overvalued even after its slide this year.
“There are indications that the U.S. dollar is now serving as the funding currency for carry trades,” the IMF said in a report published today. “These trades may be contributing to upward pressure on the euro and some emerging economy currencies.” While the dollar “has moved closer to medium-run equilibrium,” it is still “on the strong side.”
The IMF is also warning on the Chinese currency being significantly undervalued. We've covered China's currency manipulation many times and noted almost all of the U.S. trade deficit with China can be attributed to Chinese currency manipulation.
The Baseline Scenario blog has some interesting insights into U.S. Treasury Secretary Geithner's upcoming China trip.
So what should we expect from Geithner’s upcoming China trip?
Not much.
China refuses to talk politely about its exchange rate and rebuffs all sensible diplomatic initiatives on this front – they have held the IMF at bay for nearly 2 years on this exact issue. The rhetoric is that their fiscal stimulus will bring down their current account surplus without need for significant exchange rate appreciation. This is smokescreen.
China’s leaders, increasingly concerned about the nation’s $740 billion of U.S. Treasuries, are making it easier for trading partners and consumers to do business in yuan.
The People’s Bank of China has agreed to provide 650 billion yuan ($95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency- swaps. More such arrangements are being planned so importers can avoid paying for Chinese goods with dollars, the central bank said. In Hong Kong, which has pegged the currency to its U.S. counterpart since 1983, stores from Park’n Shop supermarkets to jewelers accept yuan.
Surprise, surprise. Treasury Secretary Geithner backed off the well known and well documented currency manipulation by China. Anyone believe that's because China now owns the United States?
Treasury Secretary Timothy Geithner pushed Group of Seven officials to soften criticism of China last month after his accusation that the nation was “manipulating” the yuan strained ties with the U.S.’s second- biggest trading partner, said a person briefed on the matter.
G-7 finance ministers and central bankers on Feb. 14 welcomed “China’s fiscal measures and continued commitment to move to a more flexible exchange rate.” By contrast, the group in April 2008 pressed for “accelerated appreciation” of the yuan.
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