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Monday, 11 October 2010

Currency Wars: U.S. Economy Needs More Fiscal Stimulus, Not Deficit Reduction, Yuan revaluation no panacea, GBP-USD to Target 1.5996

Soros Says U.S. Economy Needs More Fiscal Stimulus, Not Deficit Reduction

Billionaire investor George Soros said the U.S. economy should pursue more fiscal stimulus instead of joining international efforts to reduce budget deficits.

Soros said spending cuts are the “wrong consensus” in the current economic environment. He said the global economy is still not at equilibrium, even though financial markets are functioning again, and U.S. fiscal restraint is limiting the recovery.

“It threatens to push the global economy into a much longer-lasting stagnation than would be necessary,” Soros, chairman of Soros Fund Management LLC, said in a forum at the International Monetary Fund’s annual meetings. The U.S. has been “driven to quantitative easing because the political debate has been won basically by the Republicans, who argue for balancing the budget and no more stimulus.”

The U.S. is using this weekend’s meetings to call for the IMF to take a more active role in promoting global rebalancing and in rebuking countries that undervalue their currencies. The initiative is aimed at China, which has limited the yuan’s rise to about 2 percent since agreeing in June to allow appreciation.

Soros said China deserves a stronger voice at the IMF as the fund deliberates how to give emerging-market nations a bigger share of board seats and voting rights.

“China is a part of the IMF, but it’s more or less a passive part, because it doesn’t have enough voice and is not sufficiently drawn into the deliberations,” Soros said. “A lot depends on how this is going to work out.”
Corruption, Governance

Soros said China ought to join international efforts to reduce corruption and improve governance in poor countries, especially those with natural resources that could be contributing to prosperity. He said China’s decision to stay out of many international initiatives could be destabilizing if widely adopted.

“China in particular feels much more comfortable with bilateral relations” and “what I call state capitalism as opposed to international capitalism,” Soros said. “As long as China is the only one following that course, it actually derives very substantial benefits, advantages from that. But if everybody does it, it’s the end of the multilateral system.”

On the subject of international bank regulation, Soros said there is not yet a solution to the problems caused by financial institutions that are “too big to fail.” These firms are currently backed by an “implicit guarantee” from regulators, who now bear increased responsibility to make sure that protection won’t be used, he said.
To contact the reporter on this story: Rebecca Christie in Washington at; Ye Xie in New York at
To contact the editor responsible for this story: Christopher Wellisz at

Fast yuan revaluation no panacea - China's Zhou

International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn (L) talks to Governor of People's Bank of China Zhou Xiaochuan at the beginning of the International Monetary and Financial Committee (IMFC) meeting at the IMF headquarters building in Washington October 9, 2010. REUTERS/Yuri Gripas
WASHINGTON | Sun Oct 10, 2010 11:59pm BST
WASHINGTON (Reuters) - Demands that China rapidly revalue its yuan currency are akin to seeking a magic cure to a problem that requires a slow-working, herbal remedy, the country's central bank governor, Zhou Xiaochuan, said on Sunday.

Beijing realizes it must raise the value of its currency, but the strength of the yuan depends on carefully gauging economic fundamentals like inflation, growth and employment, said Zhou, the head of the People's Bank of China.

"China would like to use more gradual ways to realise a balance between domestic and external demand," he said, repeating the message he drove home at the weekend's International Monetary Fund meetings.

Zhou, speaking to a seminar on the sidelines of the IMF gathering, used a metaphor of the differences in medical practices in the East and West to highlight the challenges faced in addressing the currency debate that has pitted the United States and other industrialized countries against China.

"In China, a lot of people believe in Chinese doctors. In Western countries, they believe in Western-trained doctors," he said.

The currency debate is like a contest between "pills that solve your problem overnight" and Chinese-style treatments of "10 herbs put together ... that solve the problem not overnight, but maybe in one month or two months," Zhou said.

The often jovial Zhou and his deputies pushed back at the IMF meetings against a chorus of pressure for China to let the yuan rise further and more rapidly than the roughly 2 percent gains seen since June 19, when Beijing loosened the yuan's peg to the U.S. dollar.

Many U.S. lawmakers, labour unions and manufacturing groups believe China deliberately keeps the yuan, also called the renminbi, undervalued to keep Chinese exporters in business.

The U.S. House of Representatives last month stepped up pressure on China to let the yuan rise more quickly, passing a bill just weeks before U.S. congressional elections on November 2 that would provide new muscle to combat undervalued currencies by allowing the imposition of tariffs on goods.

Zhou earlier told reporters during the IMF meetings he believed the currency issue might "gradually fade out along with the recovery" of Western economies and job markets.

"For China, we have a package to enhance the internal demand including ... consumption, social security system reform, new investments in the rural areas," he said.

These measures, he told reporters, show "that China sincerely wants to bring the current account surplus down to a reasonable level."

On Sunday, Zhou seemed to suggest there was more potential for agreement as major advanced and emerging countries prepare for the Group of 20 ministerial and summit meetings in South Korea in coming weeks.

"It seems (there's) not very much difference between emerging markets, including China, and industrialized countries. What I see is everybody is emphasizing that the global imbalance is something that we need to deal with," he said. He noted the differences over whether rebalancing should be achieved via exchange rates or by other means to boost internal demand in countries with trade surpluses and differences over the pace at which rebalancing should occur.

China faces trade-offs between its economic fundamentals and trade surpluses, Zhou said.
"It is quite a complicated art to perform, but if we successfully keep low inflation... the yuan is going to be stronger," he said.

(Editing by Leslie Adler)

GBP-USD to Target 1.5996

NEW YORK (TheStreet) -- The pound-dollar currency pair (GBP-USD) is preparing to return to 1.5996, its Aug. 8 high, after it wiped out last week's marginal losses this week and closed higher Friday. 
A penetration of 1.5996 will resume the pound-dollar's short-term uptrend toward 1.6274, its Jan. 24 high.
Conversely, support comes in at the 1.5713 level, where a reversal of roles is likely.

However, if that level gives way, additional lower prices should occur toward the 1.5502 level, where a violation will allow for further downside pressure toward 1.5295, the Sept. 7 low.

A break there will expose 1.5122, the July 21 low, and then 1.5000, the currency pair's psychological level.
Overall, the pound-dollar currency pair now looks as though it will eventually recapture the 1.5996/1.6016 level now that it has recovered strongly.