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Emerging Economies Purchasing U.S. Dollars

Posted November. 14, 2009 08:45,   


○ Wrangling over the dollar’s value

Emerging economies such as Korea, Thailand, Russia and the Philippines have bought a massive amount of dollars to prevent their own currencies from appreciating as a result of greenback’s depreciation.

Based on the foreign exchange reserves of governments, the Wall Street Journal said major emerging economies have bought up to 150 billion U.S. dollars over the past two months. Korea’s reserves also jumped 62.97 billion dollars from early this year to reach 264.19 billion dollars in late October. The Korean government seems intent on buying dollars to prevent the dollar from weakening.

Brazilian Finance Minister Guido Mantega announced that Brasilia will tax foreign investment two percent to prevent its currency real from appreciating. Taiwan announced Tuesday that it will bar foreign investors from bringing dollars into the nation and putting them in time deposits.

In short, emerging economies are struggling to remove dollars from their real economies.

On the other hand, the U.S. government has partly enjoyed benefits from the dollar’s depreciation. Washington’s official support for a strong dollar is no more than a message to keep the currency’s status as a key currency.

The U.S. has also adopted a weak dollar policy to improve its trade balance. In line with this policy, it has pressed China to appreciate its currency yuan.

Given that U.S. President Barack Obama will arrive in China Sunday, the People’s Bank of China implied the possibility of the yuan’s appreciation. The bank announced Wednesday, “We’ll reflect changes in international cash flows and trends in major currencies into our foreign exchange rate policy.”

Experts, however, say China will allow its currency to appreciate as late as possible.

○ Will the greenback turn strong?

Amid wrangling over the dollar’s future, the greenback’s value has fallen. After jumping to 1.506 Oct. 26, the euro-dollar exchange rate has increased no more. The U.S. Dollar Index, measuring the dollar’s performance against a basket of six major currencies, has stayed at 75 instead of falling further.

Against this backdrop, experts are mixed over whether the greenback will stop falling and turn strong.

Lee Jin-woo, head of research at NH Investment & Futures, said, “Investors who predicted that the greenback will keep falling and sold dollars have recently faced limitations. They’ve begun making efforts to generate profit. The dollar could also turn strong over the near term. The asset market, which has been buoyed by dollar carry trade, will suffer losses.”

If dollars borrowed at low interest and invested into raw materials and asset markets of emerging economies are retrieved, prices of stocks, raw materials and gold are highly likely to fall.

On the other hand, other experts describe the dollar’s recent surge as a technical adjustment and predict that it will keep weakening.

Jeong Mi-yeong, head of research at Samsung Futures, said, “The recent strengthening of the dollar can be interpreted as a technical rebound that emerged because the dollar has kept weakening since March. Unless the U.S. introduces an exit strategy earlier than scheduled, the dollar will keep weakening.”