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Commentary: USD correction continues to be postponed !
Will the Fed raise rates any further? !
Korean Won remains ‘stable’ in wake of nuke test !
Pound and Euro move in lockstep !
How does public debt affect currencies? !
UK inflation data buoys Pound !
Russia buys Yen for forex reserves !
Emerging Market currencies hurt by risk aversion !
NZD strength attributed to hedge funds !
ECB lowers rate hike expectations !
Canada promises to forego intervention !
Thai Baht shakes off political crisis !
China’s forex reserves on track to reach $1 trillion !
How high will the Kiwi go? !
G7 avoid talk of Yen intervention !
Commentary: RMB’s appreciation is tied to inflation !
G7 will discuss Japanese Yen !
Foreign exchange market !
Forex scam!
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New currency ETF debuts on AMEX
An exchange-traded-fund (ETF) is similar to an index fund in that both types of securities are designed to track the performance of the index to which they are assigned. The crucial difference, however, lies in the fact that there is no centralized market for mutual funds, whereas ETFs trade on exchanges, and hence, charge lower fees to investors. At first, investment companies were reluctant to create currency ETFs, because they weren’t sure if demand was large enough to justify such products. Since currency trading surged in popularity, a spate of new currency ETFs have been introduced, the newest of which is designed to track the performance of a composite of ten of the world’s most important currencies. Previously, this type of product was only available to wealthy investors. Now, anyone with a brokerage account can index in such a way, and would be smart to do just that, in order to hedge against the decline in any single currency. The Daily News reports:
The fund is managed by DB Commodity Services LLC. “DBV will offer investors easy access to the returns of the currency markets by following a highly developed index previously available only to very sophisticated investors.”
China’s forex reserves on track to reach $1 trillion
This month, the locomotive that is China’s stockpile of forex reserves surged ahead, to $954 Billion, with economists now predicting that the $1 Trillion mark will be breached in October. Export-dependent countries-notably China and Japan- have accumulated gargantuan reserves over the last decade, as an alternative to allowing their currencies to appreciate. In most countries, Central Banks take the currency that foreigners used to pay exporters, and allow it to circulate in the economy. China and Japan have instead taken to hoarding their reserves in order to decrease demand and thud hold down the value of the Yuan and Yen, respectively. The Asia Times Online reports:
More foreign-exchange reserve demands more hedging money in local currency, which may weaken the controlling capacity of China's monetary policy, impose pressure on the appreciation of the yuan, and exacerbate foreign-trade frictions.
China's mushrooming forex reserve
BEIJING - China's foreign-exchange reserve reached US$954.5 billion in July, posting an increase of $135.6 billion since the beginning of the year. At a monthly average growth of $19.37 billion, the reserve is likely to top $1 trillion by mid-October.
Although a huge foreign-exchange reserve to some extent represents the strength of an economy, it brings more problems than benefits.
Sharp growth in the foreign-exchange reserve in recent years has
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led to great pressure on money-supply controls in China. More foreign-exchange reserve demands more hedging money in local currency, which may weaken the controlling capacity of China's monetary policy, impose pressure on the appreciation of the yuan, and exacerbate foreign-trade frictions.
What's worse, it seems that the enthusiasm for foreign investment in China has not cooled down and the trade surplus is still growing fast. Therefore, the foreign-exchange reserve will continue speedy growth, and is expected easily to come to $2 trillion by 2010. By then, the enormous foreign-exchange reserve will bring out a series of uncontrollable effects, said Ba Shusong, vice director of the Development Research Center of the State Council.
The scale of central-bank bills for hedging the huge foreign-exchange reserve will increase, which means that the interest rate and hedging cost will rise. Besides, the growing foreign-exchange reserve will accelerate the total assets in the central bank's balance sheet, more than 80% of which are expected to be foreign exchange.
Moreover, too much foreign-exchange reserve will change the asset structure of commercial banks, which have to hold in hand large amounts of central-bank bills and to bear the burden of a higher deposit-reserve ratio and maintain diversified controls on credit. Ba also warned that potential depreciation of the greenback will also threaten the safety of China's foreign-exchange reserves.
Statistics show that China's foreign-exchange reserve rose $209 billion in 2005, and in the meantime, China bought $200.4 billion worth of US Treasury bonds. Some 80% of China's foreign-exchange reserve is estimated to be in highly fluid US Treasury bonds.
A recent research report released by China's National Bureau of Statistics said that because of the worsening deficits in the United States' foreign trade and finance, it is possible for the greenback to continue its downward trend. As a result, China's dollar-dominated assets will shrink in value, and the anticipation of appreciation of the yuan will grow.
At present, two main problems faced by the Chinese government are how to curb the overheating growth of foreign exchange and how to make good use of it. Yu Yongding, director of the Institute of World Economy of the Chinese Academy of Social Sciences, attributed the rocketing foreign-exchange reserve to the 15-year surplus of China's current account and capital account in the balance of payments, which is also the result of the internal and external imbalance of China's economy.
To reduce the two surpluses, the government should increase the import of commodities and technology, which can facilitate domestic industrial restructuring and technical improvement, and encourage citizens to possess foreign exchange.
What is more important is to perfect the forming mechanism of the foreign-exchange rate in China to reinforce the flexibility of the exchange rate and enlarge its floating range, so that the risk cost for speculative funds in and out of China will increase and speculative operations will be curbed.
Premier Wen Jiabao said China will use the foreign-exchange reserve to increase the import of assets in kind and advanced technologies; support financial reform and enterprises' restructuring and reform; remove limitations on using foreign currency; and accelerate the import of reserve assets.
This is the first time a Chinese leader has favored diversifying the use of the foreign-exchange reserve, indicating that central government officials have reached a common understanding on the proper operation of the reserve, said an analyst with the Development Research Center of the State Council.
At present, the most popular ideas for best using the foreign-exchange reserve include: buying petroleum and scarce resources from abroad and participating in or acquiring overseas companies; introducing sub-core techniques and advanced devices overseas to foster domestic independent innovation; participating in or acquiring leading multinational companies, including financial institutions; and gradually enriching the gold reserve.
Xia Bin, director in charge of the Finance School of the Development Research Center, has pointed out another six approaches to using the reserve:
# One-off investing in or acquiring local small and medium-sized banks to shift the holdings from local governments to the central government.
# Encouraging foreign and domestic companies to list on the domestic stock market, and encouraging domestic financial institutions to provide loans in foreign exchange to foreign companies now with a total investment of at least $500 billion in China. Foreign companies would be called to issue bonds in dollars in China, to raise money for importing equipment, technologies and production lines abroad.
# Domestic companies and institutions in foreign debt would be asked to repay the debt in advance by buying foreign exchange with yuan or bank loans under the precondition that the activity will not violate their contracts. Meanwhile, they would not be encouraged to issue bonds overseas.
# The government should buy a large amount of equipment and technology with foreign exchange and sell it to domestic companies and institutions at a lower price so as to withdraw yuan. This would boost the development of relevant sectors.
# On the basis of continuing to improve the fiscal expense structure, reducing direct investment and enlarging public service input, the government should expand the scale of the fiscal deficit and issue longer-term Treasury bonds.
# The government could appropriate a certain amount of foreign exchange for filling the big gap in China's social-security fund, which could be invested with the return on the investment belonging to the fund. But the central bank has the right to take back all or part of the principal from the social-security fund if necessary.
http://www.atimes.com/
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