U.S.-China trade tensions undermine dollar


U.S.-China Trade Tensions Undermine Dollar

By Neil Dennis
Financial Times, London
Tuesday, April 10, 2007


The dollar fell sharply Tuesday as trade tensions between the US and China intensified. The fall reversed the gains prompted by Friday’s stronger-than-expected non-farm payrolls data.

China Tuesday declined an invitation to take part in the G7 meeting to be held in Washington this weekend. This followed earlier comments from the country's commerce ministry that it was "strongly displeased" that the US had complained to the World Trade Organisation over what was described as Beijing's failure to protect intellectual property rights.

The US trade department also complained about Chinese restrictions on the sale of foreign books and films.

Ashraf Laidi at CMC Markets said: "History has shown nations pursuing protectionist rhetoric will experience declines in the value of their currencies."

Mr Laidi indicated that Bill Clinton's trade war with Japan in the late 1990s and, more recently, in 2002, when President George Bush pressed tariffs on foreign steel.

"Recall also that the dollar dropped sharply one week ago on news of Washington's decision to impose tariffs on China’s subsidised paper industry," he said.

China said the complaints would "severely damage" trade relations and economists said the comments added to fears that the Chinese treasury may reduce its purchases of US bonds.

The US currency fell 0.6 percent against the euro to $1.3439 and by 0.6 percent to $1.9740 against sterling.

The dollar gained slightly against the yen to Y119.07, however, as the Japanese currency was hit by the Bank of Japan’s decision to leave interest rates at 0.5 per cent.

After a 0.25-point increase in February, few economists had expected the BoJ to lift overnight rates so soon. With recent data showing lower inflation and a negative core consumer price index, the central bank was expected to maintain its "very gradual" approach to monetary tightening.

Most currency strategists said they expected the yen to continue weakening as investors funded high-yielding strategies by selling the low-yielding yen.

"The carry trade is alive and well," said Mike Berg at 4Cast, the economic consultancy. He added: "With the BoJ leaving rates on hold, the yen is likely to continue sliding, led by domestic and international investors searching for yield."

The euro hit a record high against the yen, climbing to Y160.10, and was 0.3 percent higher by midday in New York at Y159.91. The yen fell 0.5 percent against sterling to Y235.05.

China's renminbi eased against the dollar on the second day the currency was traded against the US and Hong Kong dollars, the yen, euro and sterling on the new China Foreign Exchange Trade System. The new system was developed jointly by CFETS and Reuters, aimed at providing greater transparency in trading renminbi crosses. The renminbi closed at Rmb7.7352 against the dollar on the exchange-traded market, down from Rmb7.7328 in the previous session.

Sterling, although higher against both the yen and the dollar, fell to a three-week low against the euro following last Thursday's decision by the Bank of England to keep UK interest rates on hold. The pound was down 0.1 percent against the single currency to £0.6814.

Norway's krone gained 0.4 per cent against the dollar to NKr6.0811 and rose 0.5 per cent against the euro to NKr8.1130 after consumer prices rose well above Norges Bank forecasts.

Headline consumer price inflation rose 0.6 per cent month-on-month and by an annualised 1.1 in March.

Henrik Gullberg, strategist at Calyon, said: "Combined with the bullish development elsewhere in the economy and, in the labour market in particular, this is likely to trigger yet another rate hike at the next Norges Bank policy meeting."

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