China’s Liu Says U.S. Rates Cause Dollar Speculation
By Bloomberg News
November 15, 2009
The decline of the dollar and decisions in the U.S. not to raise interest rates have caused “huge” speculation in foreign exchange trading and seriously affected global asset prices, said Liu Mingkang, chairman of the China Banking Regulatory Commission.
“The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” he told reporters in Beijing today at the International Finance Forum.
Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.”
His view echoes that of Donald Tsang, the chief executive of Hong Kong, who said the Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis.
“I’m scared and leaders should look out,” Tsang said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.
Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., said today that low interest rates in the U.S. have spurred a carry trade with some currencies, notably the Australian dollar after recent interest rate increases by that nation’s central bank.
“The carry trades will further drive down the dollar’s value and fuel commodity prices,” Zhao said. “The dollar’s depreciation has also caused excessive liquidity in the global market.”
In a currency carry trade, the investor makes money by borrowing in a country with low interest rates, converting the money to a currency where interest rates are higher, and lending the money at that higher rate.
The dollar fell against most of its major counterparts as a report showed the euro nations emerged from their worst recession since World War II, encouraging investors to buy higher-yielding assets.
The euro advanced for a second week against the dollar and approached its highest level since August 2008 before stalling just short of $1.5050. The dollar dropped for a third week against the yen, falling 0.2 percent to 89.66, from 89.88.
Fed Chairman Ben S. Bernanke, a scholar of the Great Depression, has overseen a record injection of liquidity into the world’s largest economy, pledging not to make the mistake of the 1930s, when officials tightened policy.
“The dollar’s devaluation has the biggest influence on China among emerging market economies,” China Construction Bank’s Zhao said. “China has huge amount of investments in dollar assets; their safety is threatened.”
President Barack Obama may discuss China’s currency during his visit to Asia after Treasury Secretary Timothy Geithner said the region has shown a commitment to adopting “market- determined” exchange rates.
China triggered speculation on Nov. 11 that the yuan may rise when policy makers dropped a pledge from their monetary- policy report to keep the currency “basically” stable. China has kept the yuan at about 6.83 per dollar since July 2008, after a 21 percent gain in the previous three years.