A Cautionary History of US Monetary Tightening

Is US Monetary Policy Made in China?

MUNICH Because China has pegged its undervalued currency, the renminbi, to the dollar, every weakening of the dollar in the wake of America s financial crisis has also meant a weakening of the renminbi vis à vis other world currencies. But is China really to blame for the eruption of a global currency war?

The IMF s America Problem

The equivalent in United States dollars of other currencies is established on the basis of the United Nations operational rates of exchange.

National currency and unit of measure 1,000,000 United States dollars

The Dollar Joins the Currency Wars

The Federal Reserve and the Currency Wars

Assumptions on exchange rates between the domestic currency and the United States dollar

Centre for Latin American Monetary Studies

International Monetary Fund (IMF)

For claims stated in currencies other than Kuwaiti dinars or United States dollars, the currency exchange rate to be applied is the average rate in effect for the month of August 1990 for converting those currencies into United States dollars as indicated in the United Nations Monthly Bulletin of Statistics.

The United States actually is a country that is the reserve currency of the world.

The United Nations operational rates of exchange are the basis for establishing the equivalent in United States dollars of other currencies.

With regard to currency, as the budget is expressed in United States dollars, the movement of currencies in relation to the dollar could have a sizeable impact on expenditures in other currencies.

(domestic currency)

At the time, Brazilian Finance Minister Guido Mantega coined the phrase currency wars and accused the US of being the main aggressor. In fact, the US has not intervened in a major way in the currency market to sell dollars since the coordinated interventions associated with the Plaza Accord in 1985.

Why the Fed Buried Monetarism

Moreover, some emerging market currencies are joining the club of international currencies for the first time. Indeed, some analysts have suggested that the Chinese renminbi may rival the dollar as the leading international currency by the end of the decade.

Others, such as Russia and Argentina, do not literally peg to the dollar but nevertheless try to smooth movements. As a result, whenever the Fed cuts interest rates, it puts pressure on the whole dollar bloc to follow suit, lest their currencies appreciate as investors seek higher yields.

Amount in US

The IMF does have up to date guidelines that define and seek to prevent currency manipulation. These were adopted not only with America s assent, but at its insistence, at a time (the mid 2000s) when China s renminbi was greatly undervalued, contributing to the loss of millions of US manufacturing jobs.

The proportion of investments in North American currencies was increased to 54 per cent from 48 per cent, in European currencies it was increased to 33 per cent from 30 per cent, and investments in Asian currencies were decreased sharply to 11 per cent from 20 per cent.

As the United States dollar strengthened against nearly all major currencies, the overall currency effect on the Fund was negative in United States dollar terms.

Even though the Fed has not yet started raising interest rates, the well established US economic recovery and the prospect of monetary tightening have, over the last year, caused the dollar to appreciate sharply against most currencies, those of emerging markets and advanced countries alike. If the Fed tightens as early as the middle of this year, further dollar appreciation is likely.

The third argument against putting anti manipulation provisions in the TPP is that they would imperil America s ability to implement monetary stimulus. But this reflects a thorough misunderstanding of the issue.

Mr. J. P. Nicoson International Monetary Fund (IMF)

General Category

International Monetary Fund

(h) International monetary law

Around 60 per cent of the total cost of the Organization was disbursed in currencies other than the United States dollar.

This isn't 10,000, it's the local currency.

B. Payment of contributions in currencies other than

B. Payment of contributions in currencies

Given the role of the US dollar as the dominant global currency, the Fed s expansionary monetary policy generates significant externalities for the rest of the world effects that the Fed is certainly not taking into account. The basic problem is that there are essential imperfections in an international monetary system that is based on the use of a national currency as the world s main reserve currency.

The regular resources cash balance at the end of 2004 was 329 million, consisting of 318 million in convertible currencies and 11 million in non convertible currencies.

While the Fed is planning to pump more money into the US economy, the PBC is trying to reduce the amount of money in circulation in China. Money used by commercial banks to satisfy the RRR, which is held in accounts at the PBC, can no longer be extended as loans.

On the one hand, pegging local currencies to the dollar renders monetary policy completely ineffective, as in a fixed exchange rate regime.

One way that China is attempting to find out is by pushing to have the renminbi added to the basket of currencies that determine the value of the International Monetary Fund s reserve asset, the Special Drawing Right (SDR). As it stands, that basket comprises the euro, the Japanese yen, the British pound, and the US dollar.

China s Currency Conundrum

D. Payment of contributions in currencies other than United States dollars

21. Bermuda s heavy dependence on imports, overwhelmingly from the United States, and the currency s peg to the dollar mean that inflation has followed the United States pattern.7

Within the framework of the International Monetary Fund (IMF) and the Asia Development Bank (ADB)

(c) Counterfeiting currency, as defined in the International Convention for the Suppression of Counterfeiting Currency of 1929 League of Nations Treaty Series, vol. 112, p. 171.

But, because they flooded global markets with liquidity, large portfolio flows have moved into emerging market countries, whose currencies often are not as liquid as the dollar. When investment moves back into dollars, the currency fluctuations in these less liquid markets can become excessive.