Friday, October 1, 2010

Currency Wars And The Fall Of The US Dollar

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Gone are the days when the currency of a country was regarded as a barometer of a country's economic conditions. As the global economies, business and market trends change momentum towards the east, the relationship between a country's economy and its currency is getting much more complicated as governments across the globe are assuming a bigger role in propping up the financial system and encouraging economic growth.

Just as the US government released its employment data released last week, the U.S. durable goods orders data and poor the dollar index fell below the key support level of 80 points, fell over seven month low 79.255. The move came after the Federal Reserve said it would restart the quantitative easing monetary policy. Surprisingly just a week after the National Bureau of Economic Research’s Business Cycle Dating Committee finally announced that the recession officially began in December 2007 and the economic downturn ended and the recovery officially began in June 2009, the US Dollar has been virtually in the red zones to its lowest level since February as stronger-than-expected data in Europe and a drop in US durable goods orders hurt demand for the greenback. The dollar also fell to its lowest in more than a week against the yen.

Although most experts agree that the drop in the dollar was mainly due to the Federal Reserve’s willingness to continue quantitative easing. An excess supply of dollars obviously leads to a fall in its value. Some traders attribute the dollar’s fall to the increase in risk appetite. This analysis does not ring true as the price of gold is making new highs, which actually signals risk aversion.

US Vs China

Although its not just the yen but the Yuan as the depreciation of the Yuan compared to the Dollar has caused a growing tension between The U.S and China in recent weeks. The U.S is blaming the cheap Yuan for its economic issues and even financial sanctions against China have been on the cards. If these two giant economies are starting to threaten each other, the impact on the ever-slowing recovery could be enormous.

Meanwhile China's vice commerce minister has described the U.S. House of Representatives Ways and Means Committee approved bill that would let the United States apply duties on goods from countries with undervalued currencies as being "redundant". The Yuan rose against the dollar on Monday even though the central bank lowered its mid-point after nine days of stronger fixings in the face of growing U.S. pressure on Beijing to let the currency rise faster.

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