Posted July 16, 2009
China reports it has accumulated a $2 trillion currency reserve account leading the US to believe the country will increase its purchases of US debt. Commodity prices rose leading to strengthening of the Canadian and Australian dollars. The UK pound rose as unemployment figures show improvement.
The big news on Wednesday 15-July-2009 was the revelation that China had accumulated record cash reserves. The Chinese foreign exchange reserves have grown to over US$2 trillion which is an astonishing amount. The reserves have grown so large because of the need to keep the yuan-dollar exchange rate as stable as possible to maintain growing export levels.
China has been calling for a new world reserve currency, but the reserve imbalance generated by the recession means the country has had few options except to purchase US debt. So while talking about the need for a new reserve currency less dependent on the US dollar, it has been quietly accumulating greenbacks.
There is plenty of US debt to buy too. It is estimated the US will have to borrow over $3 trillion just to balance the budget for the fiscal year ending 30-September-2009. This is a record amount of debt and China already owns $763.5 billion of it as of 30-April-2009.
Because China has such a large reserve account, the US is able to run up this kind of debt with the knowledge China will purchase much of it. China is preventing the yuan from appreciating in order to maintain a viable export market during the recession.
Yesterday the US dollar fell to the lowest level it has seen in a month in response to the news of China’s cash reserve balance. China’s reserves and the reports showing some US companies had higher than expected earnings drove investors to higher yielding assets. There is less need to seek the safety of the US dollar or yen as the recession continues to show signs of easing.
It is interesting to note that one reason the Chinese reserve account grew so large was due to investor fears of a weakening US dollar. China has experienced a inflow of cash that led to the astonishing surplus. The reserve account is composed of approximately 70 percent US dollars and the balance is in the euro, yen, UK pound and a few others.
By mid-day yesterday the US dollar fell to 79.432 against the dollar index. The dollar, in fact, weakened against most global currencies including the euro ($1.4095) and the pound ($1.6441). The US dollar did come out stronger against the yen at 93.87 yen per dollar.
The US dollar fell against the South African rand to 8.103 rand per dollar as striking workers returned to work on the World Soccer stadium being built for the 2010 games. The benchmark interest rate in South Africa is 7.5 percent attracting investors seeking higher yields.
In other news, commodity prices continued to rise benefitting the currencies of countries with commodity linked economies. The Australian dollar strengthened to 80.20 US cents. The Canadian dollar also strengthened to a one month high against the US dollar reaching 89.69 US cents.
Crude oil prices have risen to over $62 a barrel again. Also rising are prices for copper and gold.
The yen weakened against the euro to 133.40 yen per euro which is the most it has fallen since May. The International Monetary Fund (IMF) has suggested that Japan should be prepared to expand its stimulus programs if necessary to sustain an economic recovery.
The UK pound strengthened against the US dollar and the Japanese yen as figures showed the country’s unemployment level is improving. The pound strengthened to $1.6415 against the US dollar and to 154.49 yen per pound. The pound fell against the euro to 85.93 pence per euro.
Poland’s zloty strengthened against the euro to 4.2767 zloty per euro after reports indicated the country has a current account surplus. In addition, Poland’s inflation rate fell to 3.5 percent in June.