I hate to sound like a broken record, but the biggest news last week was an old story: The deteriorating U.S. dollar, and how the rest of the world is becoming increasingly frustrated with America’s dollar-bashing fiscal and monetary policies. Just to demonstrate how frustrated other countries have become with a weak U.S. dollar, Thailand announced a 15% withholding tax, effective last Wednesday, on interest payments and capital gains on bonds held by foreign investors in its currency, the baht. (This was an attempt to stop global currency investors from selling their dollars to chase the suddenly-strong baht!)
On Wednesday, the Monetary Authority of Singapore knocked the dollar further down with an overnight monetary tightening move. In effect, it raised and widened the trading band for the Singapore dollar, providing further proof that the Asian economies are now strong enough to tolerate this kind of monetary tightening, compared to a U.S. dollar that suffers from the Fed’s policy of favoring “quantitative easing.”
Another example is that Brazil imposed a 2% tax on foreign capital to try to stop the appreciation of their Brazilian real. Indonesia and South Korea are also trying to restrict foreign capital inflows that are driving their respective currencies higher. The fear in these and other emerging economies is that massive waves of Western cash are being drawn into the Asia region by their higher yields and rising currencies.
Among the established Western currencies, the U.S. dollar has fallen to parity with Canada’s dollar and is at a 10-month low relative to the euro. On Friday, The Wall Street Journal reported that the Australian dollar is up 10.6% this year, reaching a 28-year high and near-parity to the U.S. dollar. In Asia, the Thai baht is up 11.9% to the dollar this year, followed by The Singapore dollar, up 8.6%. The dollar also hit a 15-year low to the Japanese yen last week, at 80.88 per dollar — close to an all-time low vs. the yen.
It now looks like the November G20 meeting in Seoul, South Korea, will likely turn into a big fight against the two nations with the weakest currencies, namely the Chinese yuan and the U.S. dollar. I should add that the Chinese yuan has recently gained ground to the dollar: China has allowed the yuan to rise 2.65% against the U.S. dollar since June, when China’s central bank pledged to allow the yuan to rise gradually. However, a 2.65% gain is not enough to placate some members of Congress going into midterm elections — a time when politicians like to make China the scapegoat for our economic problems.
In the currency wars, China holds the upper hand. China’s currency reserves are now estimated to exceed $2.5 trillion, of which approximately $1.5 trillion is in U.S. dollars. Since China’s yuan closely tracks the dollar, all China has to do is to sell U.S. dollars to gain a further competitive advantage. The fact of the matter is that China and the U.S. are joined at the hip, since their currencies are so closely correlated.
China is apparently tired of being a scapegoat for slow U.S. economic growth. On Friday, China’s Ministry of Commerce spokesman Yao Jian said, “It’s totally wrong to blame the yuan for the Sino-U.S. trade imbalance,” adding that “a relatively large yuan appreciation would definitely hurt Chinese exports.” China has also said that legislation currently being formulated in the U.S. to impose trade tariffs would be a breach of World Trade Organization (WTO) regulations, which could lead to a destructive “trade war.”
