A Limited and Asymmetric Dollar Adjustment

June 25, 2008

In comparisons with lows around mid-March, the dollar has recovered on balance 3.6% against sterling, 2.9% against the euro, and 1.1% each relative to the Swiss franc and Australian dollar.  The biggest dollar rebound is a jump of 13.0% against the yen.  Year-to-date changes in the dollar from December 31st amount to -8.3% against the Australian dollar, -7.9% versus the Swiss franc, -6.2% against the euro and -3.0% relative to the yen.  One major currency against which the dollar dropped in 1H08 is the Chinese renminbi.  That currency’s 13.6% annualized advance so far this year translates into a dollar decline of 12.0% at an annualized rate.  Since an 11-year-long fixed parity of the renminbi (also known as the yuan) was ended on July 21, 2005, China’s currency has appreciated 20.6%, or a 6.6% per annum pace (6.2% per annum drop in the dollar).  Over the same near-three year interval, the dollar has declined by a similar 21.8% against the euro but only 2.0% relative to the yen.  Many calculations suggest that the yen is more overvalued at present than the renminbi.  Customs-clearance Japanese trade data released today revealed an 82.8% contraction in Japan’s bilateral deficit with China between May 2007 and May 2008, with exports to China increasing 12.3% but imports from China falling by 4.0%.  The collapsing Sino-Japanese trade imbalance reflects currency shifts only in part.  The major reason behind the move is much stronger domestic demand growth in China than Japan.  The yen’s comparatively greater sensitivity to verbal support for the dollar conforms to past experience.  Currency manipulation has been practiced by Japanese governments to a much larger extent than by their European counterparts.  Politicians set currency policy in Japan and the United States, whereas central bankers have historically had that responsibility in Continental Europe.  In all facets of macroeconomic policy, there is a richer tradition of fine-tuning the business cycle in Japan and the United States than in Europe.



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