Archive for the tag 'Bloomberg'

Asia Adjusts, But Europe Just Complains About Weak Dollar

Kurt Brouwer October 4th, 2007

The dollar’s weakness over the past few years has required other countries to make adjustments. The Asian countries have made a number of adjustments, but the Europeans are just complaining and hoping we do something about it. David Gaffen at the WSJ Marketbeat Blog reports [emphasis in the original]:

‘Current economic conditions and concerns about the direction of U.S. monetary policy have produced the strongest euro since the currency’s inception less than a decade ago. Officials in Europe are countering with the typical reaction when currency situations are unfavorable — they’re complaining.

The euro is down just a bit from Monday’s all-time high of $1.4284, which had prompted calls from the European Union’s employers federation that the currency’s strength was beginning to hurt European businesses. French Finance Minister Christine Lagarde recently said he’d like to hear the U.S. Treasury Secretary restate the “strong dollar policy” that became a constant refrain of former Treasury head Robert Rubin…’

The complaints ring a bit hollow because the European Central Bank (ECB) has it in its power to solve the problem quite readily by simply cutting interest rates as the U.S. Federal Reserve did last month. However, they are unwilling to do that due to their hypersensitivity to potential inflation. Since they have very high rates of unemployment and relatively low economic growth, I think they should ease up on the brakes a bit and help their economies grow with lower interest rates. They obviously feel differently, in fact, the ECB has more inclination to raise rates than lower them.

At Bloomberg, Gabi Thesing and John Fraher report [emphasis added]:

‘…The ECB and the Bank of England left their key rates unchanged today after the U.S. housing slump made commercial banks reluctant to lend, pushing up borrowing costs and clouding the economic outlook in Europe. At the same time, Trichet said he’s concerned about inflation and the ECB “stands ready to counter upside risks to price stability.”

While [ECB President Jean-Claude] Trichet is “effectively committing the ECB to be on hold for the foreseeable future,” he remains “keen” to raise interest rates again, said James Nixon, an economist at Societe Generale SA in London…

The Frankfurt-based ECB has raised its key rate eight times since late 2005. The Bank of England has taken its main rate to 5.75 percent after five increases in the past year. Both benchmarks are the highest since 2001.

Europe’s economy is now showing signs of slowing as rising credit costs start hurt consumers and companies. Euro-region service industries from insurers to airlines grew at the weakest pace in two years in September. U.K. house prices, which have tripled in the last decade and powered economic growth over the period, fell for the first time in nine months in September, HBOS Plc said today…’

In my opinion, if M. Trichet were heading the Federal Reserve, there would be howls of anguish over this anti-growth policy along with demands for his resignation. Last year, for the first time in ages, Europe had pretty good economic growth. So, what has the ECB done? They have raised interest rates repeatedly and higher rates squelch economic growth. Apparently, growth is not what they want.

Rather than complaining as the Europeans are, Japan, China, South Korea and other Asian countries are just working hard to deal with the weakness in the dollar. Gaffen at MarketBeat Blog continues:

‘…“Europe may feel they are the whipping boys taking all the strain [from] the high euro, but a market is a market,” writes Ian Copsey, senior financial analyst at GFT in Tokyo. “It merely reflects the constant repricing of risk of holding currencies.”…

…It’s to the doorsteps of those Asian countries that Europe should take its complaints, says Peter Morici, professor of business at the University of Maryland. Noting that China, Korea, Japan and others continue to intervene to hold down their currency against the dollar, “the dollar falls more than it should against the euro, pound and other western currencies,” he writes.

“Essentially, the dollar is overadjusting against the euro and other western currencies, because Beijing, Tokyo and Seoul won’t let the dollar rise against the yuan, yen and won,” he writes. “That makes the euro and pound rocket when the dollar falls out of favor.”

Japan, China and South Korea cannot afford to let their local currencies rise much versus the dollar. Why? Because they are heavy net exporters to America. As a result, if any of these countries let its currency go up a lot, its exports would become less competitively-priced over here. So, instead of complaining, they just make the obvious adjustments they need to make in order to stay competitive. In effect, these countries are absorbing the impact of the lower dollar and, essentially, subsidizing U.S. consumers to counter the impact of the falling dollar.

On the other hand, Europe is complaining about the weak dollar, but it is keeping its interest rates high and this ensures that the Euro will remain strong versus the dollar. It also ensure that American and Asian exports will be more attractive than European exports. For much more on this, see:

How Far Has the Dollar Fallen? And Why?