Sound The Trumpet : Obama Goes to Beijing

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“Obama Goes to Beijing”
by Reuters - By Jeremy Gaunt, European Investment Correspondent
November 16th, 2009

LONDON - The dollar's long-term decline as the world's dominant currency will be on display next week when Barack Obama visits China, pledging to address what he sees as a "deeply imbalanced" economic and financial relationship.

Investors can probably sleep easy about any nightmare scenario unfolding -- China deciding suddenly to float its yuan currency, for example, or to sell its U.S. Treasuries and buy up a bunch of euros and other coinage with its huge current account surplus.

Such moves would be immense, sinking the already battered dollar, kicking U.S. borrowing costs skywards and driving up currencies in regions struggling to get out of recession.

But the various components of this will at least be aired.

The U.S. president has pledged to discuss the two countries' imbalances, which include a yawning trade gap and huge Chinese holdings of U.S. debt.

Much focus, accordingly, will be on China's managed exchange rate to the dollar, widely viewed in Washington as being significantly undervalued at around 6.83 yuan to the dollar.

Although China insists that it is constantly seeking to perfect its exchange rate, it has barely moved in the past year.

So the potential for a "gesture" to Obama on his visit could keep investors, and forex traders in particular, on their toes.

Then again -- as Thanos Papasavvas, head of currency management at Investec Asset Management, says -- it may be that the "gesture" has already been made.

The People's Bank of China said this week it would base FX changes on capital flows and fluctuations in the values of major currencies. But departing from past language, the central bank did not mention that it would keep the yuan basically stable.

"The fact that they have identified that something needs to be done is itself an action point," Papasavvas said. "We think they will continue their appreciation program next year. I don't thing it means anything dramatic."

DOLLAR DECLINE

Whatever the outcome of Obama's trip, it comes at a time when the dollar is struggling -- with all the implications that has for everything from more costly euro zone exports just as the bloc is exiting recession to potential currency losses for foreign investors in U.S. stocks and bonds.

The U.S. currency was trading around 15-month lows against a basket of major competitors this week. The euro was also driven up above $1.50 for a time.

The latest weekly data from fund trackers EPFR Global shows about $7 billion being poured into U.S. equity funds, although the firm said only about 7 percent of it came from non-U.S. domiciled funds.

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