Saturday, November 14, 2009

Countries Fighting Collapsing Dollar Value

A number of countries around the world are acquiring larger positions in the U.S. dollar in hopes it'll help shore up the plummenting value of the greenback to the detriment of their exports.

The most recent countries snatching up the dollar are Russia, South Korea, the Philippines and Thailand. The 15-month low of the U.S. dollar continues to raise concerns on slowing down any economic recovery because of exports from the countries having strong domestic U.S. competition because of the dollar's weakness.

Countries like Taiwan an Brazil are also concerned about the strength of their currencies against the dollar, and in the case of Taiwan they've now forbidden foreign investors from placing time deposits in the country in hopes of weakening their own currency. Comments from official in Brazil also imply there could be more action on taking steps to weaken the real.

In spite of rhetoric from Washington that they support a strong U.S. dollar, no steps have been taken to make that happen, and so it seems that's a direct nod to U.S. manufactures and unions who had backed Obama's presidential run. Exports from the U.S. increase when the U.S. dollar declines in value.

For now, China doesn't care whether the dollar rises or falls against the yuan because it's pegged to rise or fall against the dollar, keeping it at an even keel. Other countries have been pressuring China to allow the yuan to rise in value as Chinese exports also benefit from a weaker dollar as far as when competing against non-American exports.

With that in mind, there's no incentive for China to change its monetary policy, even though regional competitors complain about it. We might see some carrots thrown out to manage some of the complaints, but other than that, I don't see China making any drastic changes to their current monetary policy any time soon.

China holds all the cards in this economic battle, as if too much pressure is put on them, they could keep the import of goods from those particular nations at a small level, a major concern with the huge population in China and a solid, emerging middle class which will resume spending once the global economy rebounds.

Consequently, individual nations will have to take their own steps to make their currencies competitive, and not mistakenly wait around for some type of move by China.

For the U.S. dollar, it almost assuredly will continue to fall in value, making it even harder for other nations to compete on the international stage and with China for U.S. imports. Other nations as well are concerned, as the Euro continues to strengthen against the dollar, also making it harder for European nations to increase exports to the U.S.