China s North Korean Pivot

Europeans are wrong to be angry with China because its currency peg to the US dollar has boosted the euro against most currencies on foreign exchange markets.

It was predictable that China s currency peg would have this effect.

The Danish peg now to the euro still holds.

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Oil Currency Hypocrisy

The currency peg has also helped make the euro into an important reserve currency, rivaling the dollar.

The big downside of the currency peg for Europe is supposed to be exports.

A fixed rate was seen as a nominal anchor against inflation, forcing disciplined monetary and fiscal policies.

The world has too many currency choices.

But what about currencies?

A recent study by the IMF reports on equilibrium exchange rates derived from models of long run factors in currency valuations.

The dollar is part of an exchange rate Rubik s cube.

In the ongoing showdown over currencies, who will blink first?

After decades of exchange and price controls, the economy has enjoyed three years of open trade, free currency exchange and free prices.

Over the long run, globalization and economic convergence will resume, and emerging market and commodity currencies will have to strengthen. At the same time, the prospect of higher US inflation and massively higher US public debt levels must eventually weigh on the dollar, as does the still worrisome US trade deficit.

Over the long run, globalization and economic convergence will resume, and emerging market and commodity currencies will have to strengthen.

In a world of volatile exchange rates, pegging a currency to one like the dollar is highly risky.

Asia's crisis had much more to do with mountains of irresponsibly short debts and woeful banking systems.

Currency movements, however, were merely the straw that broke the camel's back.

So, what will the New Year bring for exchange rates?

All currencies fell against the dollar and the yen.

The Chinese are not going to change their exchange rate regime, which has strategic as well as economic motivations, just because the Europeans are unhappy with the currency peg.

After all, it is a narrative that, while demanding a suspension of one s critical faculties, bestows an unmitigated blessing upon those purportedly fighting on the side of light.

Saudi Arabia s long standing peg to the dollar, once apparently invulnerable, has come under enormous pressure in recent weeks.

Only when both sides make serious efforts to fix their domestic fundamentals will the imbalances be reduced in a serious and sustained way. Short run exchange rate adjustments simply cannot fix negative long term trends.

Short run exchange rate adjustments simply cannot fix negative long term trends.

The convergence criterion on exchange rates is in similar disarray.

The global implications of lower emerging market currencies are also likely to be deflationary.

For some people, it s become difficult to take their eyes off the market.

One example of such a policy is to link banks mandatory reserve ratios to the speed at which credit is expanding or to the stage of the business cycle.

In practice, this means fervent efforts to prevent their currencies from appreciating in value.

The Carry Trade Carries On

Japan might get some growth, probably not even a full percentage point of GDP.

In the longer run, OPEC will shift to pricing petroleum in a basket of currencies.

The implication, of course, is a huge appreciation of the euro against everybody else.

China s currency peg has also come in handy for Europe in its fight to keep inflation in check, while its monetary policy remains constrained by the sub prime crisis.

And that will require a less competitive euro higher relative to the dollar and other currencies.

In Central and Eastern Europe, foreign banks extended euro and Swiss franc denominated corporate, home, and car loans to firms and households with incomes in local currency, which added to corporate and household financial distress when local currencies tanked.

Perhaps Asian real currency values will rise sharply as a result of a burst of inflation in Asia.

This would enable them to revive economic growth and competitiveness through a depreciation of new national currencies.

Central banks have reportedly slowed their accumulation of dollars in favor of other currencies.

Other positive aspects notwithstanding, the presence of foreign banks is associated with currency mismatches.

Oligarchs with the Soviet roots occupy the leading positions in the top 300 most wealthy Swiss citizens.

Abetted by the determination of national financial authorities at the center of the world economy to protect their own institutions, capital fled from the periphery.