GLOBAL - International pension funds which invested in the US and were impacted negatively by the ‘weak US dollar policy' may find the dwindling returns more to do with China and less to do with Japan, say leading experts.
It has been generally thought that the US is most concerned about Japan’s consistent attempts to prevent the Japanese yen from strengthening, but there is now some evidence to suggest that its major cause for concern is China’s fixed peg against the greenback, according to Simon Derrick, head of research at the Bank of New York in London.
Vice president at the National Association of Manufacturers, Frank Vargo, in his May testimony on China, emphasised the need to “press China to end the manipulation of its currency and allow the yuan/dollar to be determined by the market.”
Leading emerging markets expert Mark Mobius, president of Franklin Templeton Investments, noted that the undervaluation of currency and the export push has led to a build up in foreign reserves in China, now totalling US$273bn.
By some estimates the Chinese yuan is 40% undervalued which means that “the Chinese currency is a major factor in the rising trade imbalance,” said Vargo. The US trade deficit with China clocks in at US$103bn.
But some experts question whether the ‘weak US dollar policy’, as it has become known in investment circles, is actually an orchestrated programme. BoNY’s Derrick believes that “it is wrong to characterise the US as seeking to weaken the US dollar.”
Rather they want other countries to stop artificially protecting their currencies. By abandoning such regimes, the US believes that they will be forced to stop protecting their domestic economies via artificially weak currencies and bring in the kinds of economic reform that are needed if they are to play a meaningful role in reviving economic growth worldwide.”
Rob Zink, director of portfolio strategies at Bridgewater Associates, noted: “Generally specific interventions may slow down a movement but they don’t reverse a movement.
“The fundamental drivers that are causing a currency to fall are not changed by an intervention on the part of a central bank.”
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