The third presidential debate which was watched by the entire world expecting to understand the future political strategy of both candidates, especially on military and foreign policy had given a slight edge in polls to President Obama according to mainstream media. Never the less if you pay close attention to some of the comments made by the president especially on currency exchange rates it clearly exhibited his poor understanding of the dynamics of the world currency markets. When Governor Mitt Romney spoke about the Chinese Yuan / US Dollar rate, artificially kept weaker by Bank of China (Central Bank of China) to make Chinese manufactured goods cheaper in USA; President Obama stated that US exporters enjoy the present weaker rate of the US Dollar against other major currencies. He did not address the point which the Republican Presidential candidate had brought up.
The reason why the US Dollar is weaker is not due to Obama administration had adopted a weaker Dollar policy to boost exports but as a result of weaker economic data posted by the US Economy over the past many years. It is not a surprise with an existence of ever south bound Nonfarm Payrolls and other key economic indicators, for the US Dollar to be beaten down to the level where it is now. At times some major economies try to weaken their own currency to support the exporters. Most prominent economy which engaged in such intervening in the FOREX (Foreign Exchange) market was Japan. Isuki Sakakibara, former finance minister of Japan, well known as Mr. Yen, rocked the international FOREX market in late nineties and early 2000 by moving weaker Dollar/Yen rate from 82 to a stronger147. The mighty Japanese Foreign Exchange reserves made it possible for Bank of Japan to intervene in the FOREX market and push the pair by few hundred basis points within a space of split seconds every time they got in to action, enabling Japanese Exporters to sell a wide spectrum of goods starting from Sony TVs to Toyota Cars around the world, specially to US. Perhaps the President was trying to take the credit for increased exports with the dollar weakness which happened due to actual weakness of the US economy, but this did not happen due to his economic policies.
Exchange rates between currencies move depending on simple demand and supply rules which determine the equilibrium price not only of a currency but also of any other commodity. The demand for a currency would change on future economic development and rate expectations of the respective economy. A higher rate outlook would generally push the value of the currency up while a below satisfactory and expected economic data would drag the currency down. The currency rates should and normally does reflect the economic fundamentals of the respective country. When Japan weakened their currency against the US Dollar the Japanese economy was way stronger than what it is now and the Dollar/Yen rate did not reflect the Japanese economic fundamentals then and now and Chinese have deployed the same strategy what the Japanese did in late 1990s. Here is the difference. When Isuki Sakaibara was intervening in Dollar/Yen rate Fed chairman Alan Greenspan warned and acted to hold the movement of the Japanese currency to protect US interests. It was possible hence Japanese Yen is a free floated currency but not in the case of Chinese Yuan. Mr. Ben Bernanke may have fire power of billions of Dollars but he cannot intervene in Dollar/Chinese Yuan rate because Yuan is not a free floated currency. Yuan rate is controlled by the Chinese government. China is keeping the Yuan weaker against the US Dollar when all other currencies in the world are stronger against the Dollar and Obama administration has no solution for this problem. China as we all know from nowhere started doing economically well, multiplying it’s GDP over the past decades and as a result of this positive economic performance their currency should be gaining value not weakening. This needs drastic action. This war of currencies is a larger threat than nuclear Iran. If the Chinese currency was a freely traded one, we could have intervened in the FOREX market and brought this problem to an end. Obama administration was and will look forward to diplomatic solution for this problem but Chinese will not even pay attention to a soft diplomatic approach on this issue. This is the question what Governor Romney was asking from the President during the debate which he did not answer. Unfortunately most Americans have no idea about this matter. The whole world is watching America being intimidated by the Chinese not by their military but by their Central bank.
This is huge. We are losing our status as a strong leader in the world. In the Middle East we have completely lost our image as a super power due to completely failed foreign policy of the present American regime. I lived and worked as an investment adviser and a currency strategist in the Middle-East for almost a decade and I assume I have the minimum qualifications to make this statement. The Greenback is the reserve currency of most other countries. It is also the base currency for all international trading activity. In Asia people always store their wealth in US Dollar and at times, under their pillows. Whatever people may say or foreign media would broadcast still in the minds of most people around the world America is the Super Power, Economic giant and land of opportunity. The day we lose this status no one will buy our stocks or real estate. The demand for Dollar will drastically fall and you might see people lighting their cigarettes using Benjamin. This war of Currencies is not like any other war. You don’t hear the sound of artillery but you can see the casualty in your own household suffering without work triggering higher rates of crime. Let us hope and pray that our leaders understand the new trends of currency warfare. This needs immediate and decisive action ideally, a Republican kind.