Currency Conundrums

forex · #1 09-03-10, 10:37 AM

The bitter row between America and China over the value of the Chinese currency has brought into focus just how important currencies and their valuation are to the global financial markets. Whilst America and China may be the most obvious example of a currency argument, the same problem is playing itself out across the world.

In the industrialised world the strength of the currency is vital in determining the price of exports. Japan, Germany and China, three countries that are famed for their exporting all have benefited at various times from unfeasibly weak currencies. Germany, at the moment, is one of the best performing economies in the world, but in the context of the eurozone has a very weak currency, whilst Japan's government has frequently taken action to devalue the yen, as the Chinese government is doing now.

The reason for this currency manipulation is simple, the cheaper the currency, the cheaper the exports, the better the economy does. This is all very well as long as there are other companies who are willing to run up trade deficits, but in the current economic climate the developed world doesn't want to run trade deficits, they want to run surpluses (or as close to it as possible).

Yet, people need goods, so the exporting companies continue to export. The issue that is looming, however, is that countries like America are seriously struggling economically, the recovery there has a whiff of despair about it, American consumers aren't going to buy very much of anything if they enter another full blown recession, and the American government will take measures to increase the cost of the cheap Chinese goods that are arriving on their doorsteps, such protectionism is no good for anyone.

So how does the current situation unravel? One hope would be that developing countries will take up the slack, but developing countries only become developed countries by exporting their goods cheaply, and they can't very well do that and provide the market for the west's exports.

It is a problem from which there is no easy solution. China simply has to loosen its grip and actually allow the remninbi to gain in value, and Japan has to find a way to refocus its economy, it cannot rely on exports as much as it does. America also needs to reorientate itself, after all, the balance of imports and exports has to be more even across the world, and America will have to relinquish some its economic power in order to achieve that, or have it wrested painfully from its grasp.

Of course, the American government will be unwilling to do so, the Chinese government will be equally unwilling and the Japanese government just won't. In the meantime China seems to be attempting to make the remninbi something of a reserve currency in various parts of the world, which could have drastic and unforeseen side-effects for the dollar and for the Chinese currency itself.

Still, these are potentially profitable times for foreign exchange traders, particularly with the expansion of spread bettingcompanies like Tradefair who give traders the means of trading with their own money directly on the financial markets. Volatility is dangerous, but also extremely profitable if you're in the right place at the right time. For the moment, keep an eye on China, and particularly for news of its diversification of its foreign currency holdings.

fdfx · #2 02-23-11, 02:57 PM

Awesome article... thanks for sharing =)

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)

Currency Conundrums

Currency Conundrums

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)