China Warns of US Currency Devaluation

Posted July 28, 2009

Canada’s dollar finally stopped strengthening after 7 straight days of increases. The Swiss franc did not weaken as expected despite government market intervention. The Columbian peso weakened after the government indicated it would monitor the peso’s rise.


Canada has been concerned that continued strengthening of the Canadian dollar would put the brakes on economic recovery, so you could almost hear an audible sigh of relief when the loonie held yesterday against the US dollar. The Canadian dollar has strengthened for 7 straight days, but declining oil prices finally slowed the rise down.  Oil fell to $66.68 for a barrel of crude.

At one point the Canadian currency had reached a ten-month high before it began to fall back to a steady rate.  The loonie finally ended the day New York Time at 92.55 US cents or C$1.0814.  The ten month high rate was C$1.0750.

Besides oil prices falling, the loonie was not moving as investors digest the news that US consumer confidence fell in July more than had been predicted.  The index was at 46 percent with anything under 50 indicating consumer pessimism.  Despite government assurances the recession is easing, consumers are well aware that millions of people remain unemployed and there is still a lot of instability in the financial markets.

The Japanese yen weakened against most global currencies as the Japanese stock market rose a half percent indicating investors are seeking higher asset yields.  The yen fell to 94.56 yen per US dollar and to 134.16 yen per euro.

The Swiss government has been intervening in the currency market to stop or reverse the franc’s rise.  But despite the intervention, the franc has refused to weaken signaling that European investors are ready to turn to it when seeking safe haven assets.  The stubborn franc was at 1.5249 francs against the euro and at 1.0684 francs against the US dollar.

The Columbian peso is under observation as investors digest the central bank’s statement that it plans to “carefully monitor” the peso’s rally.  The peso has strengthened by 23 percent against the US dollar since 27-March-2009.  It was at 1,994.52 pesos per dollar yesterday.

There are several factors impacting the peso’s value besides the central bank statements.  The drop in the price of oil is one factor since it is Columbia’s primary export.  In addition, there are increasing political tensions between Columbia and Venezuela over the USA use of Columbian air bases for raids on drug fields.

The Venezuela bolivar weakened against the US dollar to 7.04 bolivars at one point yesterday.  The weakening was largely due to the failure of the government to register dollar-denominated bonds sold at the beginning of the month by the state owned Petroleos de Venezuela SA.

The bonds can be sold by investors to obtain the dollars only after they are registered.  This enables investors to bypass currency market restrictions.

US and Chinese officials wrapped up the first “Strategic and Economic Dialogue” summit to be held annually from this point forward.  Country officials US Treasury Secretary Timothy Geithner and Chinese Vice Premier Want Qishan agreed both countries need to keep stimulus spending flowing until the recovery is stabilized.  Many other topics were discussed also including climate change and energy.

But the devaluation of the US currency was a topic the Chinese did not plan on avoiding.   Qishan wrote a letter stating, "As a major reserve currency-issuing country in the world, the United States should properly balance and properly handle the impact of the dollar supply on the domestic economy and the world economy as a whole.” 

The Vice Premier’s words reminded everyone that China holds a significant amount of US debt and is concerned about maintaining the value of its holdings.  The US had trouble selling $42 billion of 2-year debt yesterday at auction raising early concerns about the ability of the US to fund its growing debt.