Making China scream

Essay by vyasdhaval August 2005

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Market players are notoriously knee-jerk in their thinking and the recent price action on the dollar (versus the euro), which, incidentally, has spilled over into the cocktail party circuit, is being ascribed to the renewed round of structural fumbling within the European Union, which was triggered by the French "non" to the European constitution back at the end of May.

This, together with fresh signs of weakness in some of the major European economies, will finally push the ECB--so the analysis goes--to cutting rates; with the Fed, at best on hold, at worst still tightening, this will continue to keep pressure on the euro.

[My belief, incidentally, is that the French "non" really signals a hiatus in the "inexorable logic of globalisation", but more on that another time.]

The yen, on the other hand, is hostage to the possibility that China may revalue, delink, change baskets, do something, sooner or later, which will give Japanese (and other Asian) exports a boost.

Hence, the yen, despite having weakened against the dollar, remains relatively strong--indeed, it has gained 7 per cent against the euro since mid-April.

Thus, the argument continues, the dollar isn't strong; it's just that the euro is weak. I mean, how can the dollar be strong--remember the twin deficits?

America has been living beyond its means for years and--again, sooner or later--the piper has to be paid, right? Now, a month or so ago, the US deficits had--surprisingly--slipped off the mental screen of the market.

They came back with a bang last week with the release of the most recent round of trade and capital inflow figures, which showed--yet again--that capital flows during April were not enough to cover the trade deficit.

With these arguments once again in the ascendancy, even though the symphonic growling of the bears...