14
ECONOMIC SUMMARY
A dollar recovery may depend
on China revaluing the yuan
BY KEITH WADE, CHIEF
ECONOMIST, SCHRODERS
Dollar weakness has been
an important theme in markets
as investors have
sought commodities as a
hedge, driving gold for
example, to new highs.
Stronger commodity prices
have in turn supported the
rally in equity markets
since March, primarily
through the materials and
mining sectors, which have
led the rally.
Despite these developments,
the US authorities
continue to talk of a strong
dollar, with Fed chairman
Ben Bernanke arguing
recently that its commitment
to price stability
and maximum employment
“will help ensure
that the dollar is strong
and a source of global
financial stability”.
So what might bring
a strong dollar? In the near
term, the key driver
is interest rates and
Bernanke’s words of support
were undermined by
his comment that US interest
rates would remain
exceptionally low for an
extended period of time.
With the Fed funds rate
trading at close to zero, the
dollar has become the
funding currency of choice
for the carry trade, a situation
unlikely to change in
coming months.
Another potential source
of support could be the
trade deficit which has narrowed
over the past year.
This is encouraging, but
Dollar weakness has
impacted on markets,
and the US authorities
talk of recovery, but
what factors could
bring a strong dollar?
counter counterpoint point
only to be expected in
an economy experiencing
a deep recession: as
demand has fallen imports
have plummeted.
Consequently, much of
the improvement in the
trade and current account
has been purely cyclical
so, as the economy recovers,
the deficit is likely to
deteriorate once more. This
is disappointing as the
dollar fall should have
given the US a competitive
advantage.
Most of the shortfall is
with countries that have
pegged or linked their currency
to the dollar.
Consequently, there has
been no change in com-
petitiveness with those that
matter, thus leaving the
rebalancing of the US trade
position to take place
entirely against currencies
like the euro and the yen.
Markets recognise this,
so the most likely trigger
for a more general recovery
in the dollar would be
if China decided to revalue
the yuan. This would
spread the burden of
adjustment, taking the
upward pressure off the
yen and the euro.
United Kingdom
■ The UK’s trade deficit with the rest of the world
widened in October, as imports rose more than
exports. Deficits in goods and services were £3.2bn
compared with £3.1bn the previous month.
■ In his pre-budget report, Alistair Darling introduced a
200% penalty for those with offshore assets who fail to
declare them by the deadline of 4 January.
■ He also introduced a one-off 50% tax on discretionary
banking bonuses above £25,000 to be levied against
the bank, rather than the employee receiving the bonus.
■ The Bank of England stuck to its plan to buy £200bn of
bonds while also maintaining interest rates at 0.5%.
United States
■ Exports rose to their highest level in nearly a year that
led to the US trade deficit narrowing in October. The
deficit dropped to $32.9bn (£20.2bn) from $33.7bn
(£20.7bn) in September.
■ The US has extended its $700bn Troubled Asset Relief
Program (Tarp) bail-out scheme until October 2010. It
was due to expire at the end of 2009.
■ Manufacturing continued to grow in November as the
purchasing managers’ index fell from 55.7 to 53.6.
■ US retail sales rose in November by the largest amount
for four months, 1.3%. Similar sales for October were
revised downwards to a gain of 1.1%.
Japan
■ Japan’s economy may be weaker than previously
thought as its rate of growth for Q3 was revised
downwards from 1.2% to 0.3% compared with Q2.
■ The government has announced a Y7,200bn (£51bn)
fiscal stimulus package to reduce the risk of any further
economic falls.
■ In October, Japanese machinery orders fell by 4.5%
compared with September which itself had increased by
10.5% on August .
PORTFOLIO ADVISER [www.portfolio-adviser.com] JANUARY 2010
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