Exchange Rates and International Reserves, Currency...

6.5. Exchange rates and international reserves

During the global crisis and the accompanying one hundred economic recession, there were significant fluctuations in the exchange rates of major currencies as a combination of both weakening and strengthening of differently acting factors related to the risk and the expected rate of profit. Although since 2008 the US dollar exchange rate relative to the euro fluctuates within narrower limits, its volatility remains high. In the summer of 2010, the dollar strengthened once again as the euro weakened due to the debt crisis in Greece and the threat of debt crises in other EU countries. This situation also exposed such institutional weaknesses of the European Monetary Union as absence of the mechanism of the lender of last resort. The existence of such a mechanism would allow more rapid response to the debt crisis in Greece. Despite promising prospects for the state of the Japanese economy, nevertheless, since 2008 there have been significant fluctuations of the dollar against the yen. One explanation for this phenomenon can be the important role of the yen in the market of short-term speculative currency transactions, which helps maintain the Japanese currency.

In 2009-2010. the increase in the volume of foreign exchange reserves continued throughout the world. In 2009, they increased by about $ 1 trillion and totaled $ 7.7 trillion.

Almost the entire increase in reserves is accounted for by developing countries and countries with economies in transition. Although one third of the world's reserves are accounted for by China alone ($ 2.6 trillion in 2010), the largest percentage increase in reserves was recorded in Latin America, including Mexico and Brazil. Japan accounts for 1.1 trillion dollars. The United States also increased its reserves, which amounted to more than $ 500 billion in 2010.

One of the main sources of accumulation of reserves in developing countries and countries with economies in transition is the resumption of growth in capital inflows to these countries. An incentive for further substantial increases in reserves could also be lessons learned from the financial crises of the past decade, during which it seemed that countries with large foreign exchange reserves were more able to withstand external shocks. However, self-insurance in this form is very costly for developing countries, since trillions of dollars stored as reserves and invested to finance budget deficits of the leading developed countries could otherwise be used by them to develop their own economies. It also seems paradoxical that individual countries continue to accumulate reserves for self-insurance, despite a substantial increase in the amount of IMF resources to meet the funding needs of those Member States that face external shocks. Moreover, such a situation points to the importance of moving forward in reforming the world's reserve system.

Currency war: the Chinese yuan and the US dollar

In October 2010, the "Financial Seven" met in Washington. (G-7). One main question was discussed - how to prevent the "currency war" (the term was first used by the Minister of Finance of Brazil Guido Mantega). Its essence is that the leading countries of the world are trying to pursue a policy of understating their currencies in the struggle to expand export markets for their goods. It should be noted, currency warfare pursues the same goals as protectionism, but moves towards these goals on the other hand. Recall protectionism is protection against imports through increased duties and other hundred restrictions. Currency War - is the state's support of exports through understating the exchange rate of the exporting country. The goals in both cases are the same - the desire to expand opportunities for demand for their producers' products through import substitution (in the case of protectionism) and increase exports abroad in the case of the "currency war". In 2010, the United States, Japan, South Korea, and Taiwan resorted to currency interventions (ie a massive injection of the national currency into the market with a view to weakening it - devaluing).

But truly effective in the long term, the policy of "weak" currency uses China. Weak the currency in this context has the meaning that it is heavily "lightened" compared with its real value and in relation to other currencies. The US and the EU have been criticizing China for a number of years for "currency expansion", insisting that the renminbi rate be raised (revalued). The Chinese authorities partially ceded these requirements, "easing" the RMB exchange rate, but not enough to appease the US. Beijing, of course, knowingly does not convert the yuan, since then it will be regulated by the actions of market forces in the financial and foreign exchange markets, while non-convertible currencies are in the sphere of direct state financial and economic policy. Therefore, it is not by chance that many analysts believe that the low (understated) exchange rate of the yuan is one of the main elements of the Chinese economic miracle. It is also interesting that the term "currency war", first, was born after its result was China's ascent to the pedestal of the world's second industrial power; and secondly, representatives of the official authorities of the leading countries are afraid to accuse China of "currency war". So, in the course of the October meeting of the "Financial Seven" all participants carefully watched to avoid linking China to the repeatedly pronounced phrase "currency war". However, the famous financial player George

Soros at the same time said that at present "in the world economy a special situation has arisen when China actually controls the world monetary system".

This, of course, is not entirely true, since the main responsibility for the state of the world foreign exchange market lies with the Fed and the ECB, as well as with the Bank of England and the Bank of Japan. Their rates are the main regulators of the world economy. However, according to Soros, "this scheme is already obsolete". The problem is not only in the non-convertible yuan, but mainly because, with the huge amounts of international reserves (over $ 3 trillion in the first quarter of 2011), Beijing is now guided solely by its political interests when they are deployed. So, right up to the global crisis, China and the United States had a consensus: China's huge surplus in bilateral trade was offset by the placement of Chinese dollars in American securities. But now, China has moved away from this rule and is increasingly shifting its foreign exchange reserves to the euro, which caused the euro to rise against the dollar in the fall of 2010. This demonstrated the real power of China, which can significantly influence the world economic situation.

Obviously, this situation creates major imbalances in the world economy. It is also clear that these imbalances can largely be solved by increasing the volume of US exports to China, but for this it is necessary to revalue the yuan and, not least, significantly expand China's domestic demand. From our point of view, to demand from the Chinese leadership sharply "to ease" the yuan is meaningless, since it not only can not give a positive result, but also has serious negative consequences if the Chinese leadership decided on this measure. It is necessary to take into account the interests of this country - any "failure" in its development not only will not improve world financial stability, but rather - exacerbate it, so it should not be accused of China's "expansion" or other troubles of the world economy. The problems in the world economy are not created in Beijing, but in Washington, London, Tokyo and other world financial centers, and not in recent years, but in the 1980s-1990s, when the financial market was consciously "launched" policy of libertarianism of these countries under the dictation of powerful TNCs and TNBs. Now the whole world is reaping the rewards of the then-dominant confidence in the magical power of the market, subject to global flows of transnational capital in an insatiable thirst for enrichment.

Also We Can Offer!

Other services that we offer

If you don’t see the necessary subject, paper type, or topic in our list of available services and examples, don’t worry! We have a number of other academic disciplines to suit the needs of anyone who visits this website looking for help.

How to ...

We made your life easier with putting together a big number of articles and guidelines on how to plan and write different types of assignments (Essay, Research Paper, Dissertation etc)