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Busch: Pressure Builds and Expands For Chinese Trade War

Friday, 13 Nov 2009 | 10:21 AM ET

New Zealand PM English says US dollar likely to decline further, says he discussed US dollar with US Treasury Secretary Geithner, says Asian countries should not be worried about FX appreciation, but says he's concerned about the strength of his own currency and it's impact on NZ exports.

Thailand Finance Minister Chatikavanij says they have bought $15 bln in 2009 to slow US dollar descent, says China stressed APEC need to ensure no rise in protectionism, says no indication from China if or when a yuan revaluation will take place, and says weak yuan forces Asian central banks to curb their own currencies to maintain competitiveness. "Quite clearly, all Asian central banks have found it necessary to intervene and it's costing us."

World Bank President Zoellick says value of currencies reflect savings imbalances, says the US dollar fall is natural for it to fall after it rose due to safe haven demand, says that US dollar will be hard pressed to rebound, says that a more flexible Chinese yuan would be useful.

This is exactly the pressure that I've been forecasting from the rest of the world on China.

The US is not going to actively intervene to support the US dollar, but merely try to shape it's domestic policies to ensure a strong dollar.

A free floating currency acts as a stabilizer to an economy.

The currency weakens as the economy weakens to provide exporters a stronger competitive advantage to sell more. This has happening in the US against our trade partners since last fall......not much against China.

This means the currency adjustment process pain is falling against all of the US trade partners except China.

This means that China is benefiting from the weak US economy and weak US dollar.

This means that the rest of the world is losing out to China. This means that the rest of the world needs to engage China and get them to change their currency peg.

Or suffer the consequences. This is why China is urging APEC to be against rising trade protectionism because it's going to be targeted at China. If China doesn't move to have the yuan appreciate and the US dollar continues to weaken, the rest of the world will have no choice but to bring trade sanctions against China. This means the risk of a global trade war grows every day that the Chinese don't move on their currency.

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Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.

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