Reverse swing US Vs World?
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China has “far more control over the price of the dollar than the US”, says Leigh Skene, an associate at Lombard Street Research.
Although some of the US currency’s weakness since March can be attributed to greater risk appetite and “carry trades”, there is a better explanation for the drop in the dollar, he says.
“Changes in the dollar correlate far more closely to changes in international reserves than any other variable since 1999.”
Skene notes that dollar loans from non-US banks to overseas borrowers to pay for anything other than imports from the US are completely separate from American trade and investment flows, yet affect both international reserves and the supply of dollars in international markets.
“The proceeds of such loans will inevitably be converted into another currency and so end up in the foreign exchange reserves of a central bank,” he says, adding that growth in these dollar loans partly accounts for the increase in China’s foreign exchange reserves.
Skene says America’s abrogation of its responsibilities as host to the world’s reserve currency has made its fiscal and monetary policies and its trade and investment transactions subservient to foreign influences. He believes the dollar will remain weak as long as China’s economic locomotive ensures robust global growth – but will strengthen once the global economy weakens
http://www.moneycontrol.com/news/world-news/chinas-control-over-pricedollar_424670.html
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