Emerging-Market Currencies Soar
David Wessel/Wall Street Journal
Currency markets, seeing few signs global financial officials made progress in defusing tensions in last weekend’s talks in Washington, Thursday resumed their seemingly relentless determination to push down the U.S. dollar, particularly against currencies of emerging markets.
Dollar Weakens Near 15-Year Low Against Yen Before Bernanke Policy Speech
Keith Jenkins and Candice Zachariahs/Bloomberg
The dollar traded near its weakest level in 15 years against the yen before a speech by Federal Reserve Chairman Ben S. Bernanke that may indicate whether the central bank will ease monetary policy further…Bernanke will speak later today at the Boston Fed conference.

QE is working: gold up, euro up, EU politicians up in arms
Editors/Euro Intelligence
The deliberate attempt by the Federal Reserve to create more inflation is beginning to have a big impact on financial markets. Yesterday the dollar came under selling, and commodity prices increased after the release of the Fed’s minutes suggested that QE is now virtually a certainty.
Emerging Markets: Investment Opportunities in the New Normal
Curtis A. Mewbourne/Pimco
For investors looking for government exposure as opposed to private companies, there are two alternatives, namely local currency and dollar-denominated government bonds. The regionally diversified J.P. Morgan GBI index was yielding around 6.25% at the end of September, which is about three times the yield of similar maturity government bonds from developed markets. And while historically higher interest rates in EM countries were thought to be compensation for currency weakening, given current conditions we think the highest probability is that EM currencies will appreciate vs. the U.S. dollar. Thus, investors may benefit from both higher interest rates and currency appreciation. Interestingly, in the aftermath of the global financial crisis, local government bonds as represented by the JPM GBI index have behaved more like developed country interest rates, posting more than 16% returns this year through September, while global equity markets overall (as represented by the MSCI World Index) have gained 3.5%. Of course, all investments involve some degree of risk, and for EM investors those risks would include political risk, policy risks and, in some cases, liquidity risks. But on balance we think the balance of potential risks and returns looks compelling.
Only the Weak Survive
Nouriel Roubini/Project Syndicate
The risk of global currency and trade wars is rising, with most economies now engaged in competitive devaluations. All are playing a game that some must lose.
China still stockpiling foreign currency
Chris Isidore/CNNMoney
In the latest sign that the Chinese could be keeping the yuan artificially undervalued, China’s currency reserves jumped in the third quarter, to one of the highest levels on record…
Mark Williams, Senior China Economist for Capital Economics, said the Chinese report Wednesday of a $194 billion rise in the value of Chinese foreign currency holdings during the third quarter is one of the biggest on record and a sign that intervention by the People’s Bank of China is far from over.
Part of that rise is due to the decline in the value of the dollar versus other freely traded currencies, such as the yen and the euro, during the quarter. But Williams estimates China made purchases of about $108 billion. He said it’s proof that the Chinese are going to keep intervening in the markets to keep the yuan in check.
Two visions of macro
Scott Sumner/The Money Illusion
There seem to be two approaches to macro policy, once interest rates hit the zero bound:
1. The pessimistic view: In this view, monetary policy can do no more. Trade balances become a zero sum game. The US gains from some (not all) contractionary policies adopted by other countries, such as currency revaluation. If China sharply revalues its currency, it may cost millions of jobs in China, and hurt countries that export materials and machines to China, but it will boost jobs here. It might not be accurate to claim this is a zero sum game view of the world, but it comes pretty close. (By the way, I used the term ’sharply revalue’, as I think a gradual revaluation is in China’s own interest.)
2. The optimistic view: Even at the zero bound monetary policy is still the most important factor driving [nominal GDP] growth. It’s not a zero sum game. A sharp Chinese revaluation might reduce world [aggregate demand]. A dramatic easing by the Fed would not just depreciate the dollar against goods and services, it would sharply raise world [aggregate demand], and world [real GDP] if there is slack in labor markets. This could easily help overseas firms, even in countries whose currencies might rise a bit against the dollar. In this view, you don’t look for jobs by trying to take them away from other countries, even countries that might be “misbehaving” according to some sort of arbitrary “rules of the game” that never did and never will exist, but rather you try to generate jobs in your own country by boosting your own [aggregate demand].