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September 2020
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Composition of world’s FX reserves

According to IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) database, US dollar remains the preferred reserve currency. In the fourth quarter of 2011, the dollar made up 62.1% of official reserves. The dollar accounted for 61.4% of official reserves in 2011 vs. 61.8% in 2010 and 62% in 2009.

See the chart below.

(graph courtesy of Northern Trust)

 

Euro = Failure

“You are all in denial. By any objective measure the euro is a failure. And who exactly is responsible, who is in charge out of all you lot? The answer is none of you because none of you have been elected; none of you have any democratic legitimacy for the roles you currently hold within this crisis.”

 

 
 

What’s Euro’s endgame?

Chris Wood shares his insights on what’s likely the endgame of European sovereign debt crisis.

He predicts it will be either a move from monetary union to fiscal union, or a complete breakdown of the Euro. He thinks the first scenario is more likely and Germany will eventually budge.

 

Then, Jim Rogers comes in with his thoughts:

Bridgewater’s Dalio on Investment Outlook

Ray Dalio, founder & CIO of Bridgewater Associates, runs the world’s largest hedge fund with $89 billion under management, returning more for the fund’s investors last year than Google, Amazon, Yahoo and eBay combined.

In this CNBC interview, Dalio shares his view on the US dollar, world investment outlook, the ongoing great deleveraging and the great divergence between the developed vs. developing world.


China-US: Frenemies – Battle in Rap

How much has Chinese Yuan really appreciated?

According to Economist Magazine, adding rising labor cost, Chinese Yuan has appreciated by nearly 50% against US dollar since 2005.

A real exchange rate takes account of price movements in each country. If prices rise faster in China than in America, China’s real exchange rate goes up, even if its nominal exchange rate stays the same. That’s because higher prices at home make China’s firms less competitive abroad, just as if their currency had gone up.To calculate the real exchange rate, you need a gauge of prices in each country. Many economists use the consumer-price index (CPI). But the CPI contains lots of goods and services (such as housing rents) that cannot be traded across borders.

Our measure of the real exchange rate, which we will regularly update, offers a more direct measure of competitiveness by looking instead at unit labour costs: the price of labour per widget. These costs go up when wages rise or productivity (widgets per worker) falls. In American manufacturing, unit labour costs have risen by less than 4% since the first quarter of 2005, according to the Bureau of Labour Statistics. In Chinese industry they have risen by 25% over that period, according to our sums.

http://media.economist.com/images/images-magazine/2010/11/06/fn/20101106_fnc574.gif

Link to the analysis.

The Fed is set to surpass China…

The Fed is set to replace China as the largest holder of the US treasuries.

(source: Bloomberg)

Chinese government does not have much choice here.  It can’t ditch dollar – that’s the only international reserve currency today, probably the safest one in time of crisis;  It can’t buy gold, not much. Otherwise, it will push up gold price dramatically.  It can’t buy high-growth currencies, like Aussie dollar or Brazilian real, either:  the appreciation of these currencies will make China’s imports of natural resources more expensive.

Chinese central bank is left with roughly three choices:

1) buy assets denominated in Euro and Yen – Germans and Japanese then won’t be happy because now every country  seems to have adopted a “beggar-thy -neighbor” policy, trying to increase exports through currency devaluation.

2) buy hard assets, such as oil, gas and mines – that’s what China had been doing.  But this is likely to stir a lot of nationalism –   Nobody likes such government-led big purchase of its own natural resources, especially this government is led by a Communist Party.

3) equity investment in or partnership with good-solid companies.  Companies like Warren Buffet’s Berkshire Hathaway, Goldman Sachs, JP Morgan, Coca-cola, HP, etc…these solid blue chip companies with diversified international portfolio.

In the long term, China should work on designing an alternative international monetary system – a system not based on any paper currency of a single country.

A snapshot of global imbalances

Source: NYT