Posts Tagged ‘volatility’

Another $600 billion injected into the system

Thursday, November 11th, 2010

The dollar continued its rebound in Asia on Wednesday morning on the eve of the opening of the G20 in Seoul. The greenback continues to benefit from the unwinding of some short positions before the summit, which brings a high risk of volatitility. The dollar now trades at 1.3755 / euro between banks.

The G20 meeting comes in the wake of the announcement last week of an additional $600 billion dollars injected in the U.S. financial system by the Federal Reserve. This leads some to say that the U.S. policy of competitive devaluation threatens more than ever the global monetary equilibrium, starting with the German Finance Minister Wolfgang Schäuble, who accused the Fed and its chairman Ben Bernanke of undermining the credibility of U.S. financial policy.

On the eve of the G20 summit on Thursday and Friday in South Korea German Chancellor Angela Merkel said in an interview that the euro should not bear alone the weight of monetary policies designed to maintain some currencies at artificially low levels. “A stable currency like the euro should not bear alone the burden of such adjustments,” she told the German daily Die Welt. This statement appears as a thinly veiled criticism against China and the United States in particular.

The Federal Reserve has raised outraged reactions from Europe especially in Germany by deciding once again to flood the market with liquidity, which could weigh on the dollar and thus harm European exports. “A policy that is based on a currency kept artificially low and the resulting benefits for exports, is shortsighted and undermines all,” said Merkel.

A Chinese official has also recently stepped into the breach to denounce “a shock to the global financial markets”. This is the Chinese Vice Minister of Finance Zhu, who said there will be frank discussions about it at the G20: “The United States must assume its role and responsibilities in the global economy” added the official from China has the merit of clarity.

As for Ben Bernanke, the Fed chief has tried to justify himself by saying that it was vital to global stability that the economy of the United States found some strength. A position criticized even internally as the chairman of the Federal Reserve Bank of Dallas said that he was opposed to this last decision of the U.S. central bank, arguing that the strategy is bad for savers, it will push up commodity prices, add to financial speculation and could prove very costly if interest rates rose suddenly.

One thing certain is that the financial crisis is not over and this G20 summit might be the place of intense debate among the political leaders of the major economies.