Dollar Strengthens, but Still Remains at Low Levels

In the currency markets last week, the dollar strengthened after the statement from the U.S. Secretary of the Treasury that he sees no reason for further decline of the dollar against the euro and yen, but it still operates at low levels as a monetary policy easing in the U.S. is expected. Against the European currency, it strengthened by 0.22 percent, bringing the euro exchange rate down to 1.3950 dollars.

The dollar index, which shows the value of the U.S. dollar against six major world currencies, rose last week by 1.2 percent to 77.40 points, significantly distancing itself from 76.14 points, the lowest level this year, which it fell to a week earlier.

Against the Japanese currency, the dollar price weakened by 0.07 percent to 81.35 yen, still hovering near 80.88 yen, the lowest level in 15 years. The euro also weakened against the Japanese currency by 0.36 percent, bringing its exchange rate down to 113.50 yen.

Ahead of the meeting of finance ministers and central bank governors of the G20 group of the world’s largest economies on Friday and Saturday in South Korea, statements from high officials about currency wars and their detrimental impact on global trade have been frequent. The most attention was drawn to the statement by U.S. Treasury Secretary Timothy Geithner, who said he sees no reason for further decline of the dollar against the euro and yen, asserting that the leading world currencies are well aligned.

In an interview with the Wall Street Journal, Geithner emphasized that the U.S. does not seek to lower the value of the dollar, and that no country in the world can “devalue its way to prosperity.” Geithner categorized currencies into three groups: the first includes countries whose currencies are undervalued by all criteria, the second includes developing economies with flexible exchange rates that intervene or impose taxes to reduce risks, and the third includes leading world currencies that are now roughly aligned.

His statement that the exchange rates of leading world currencies are generally aligned interrupted the decline of the dollar against the euro and yen. However, the pressure on the U.S. currency has not completely eased, given that further quantitative easing of monetary policy in the U.S. is expected.

How the exchange rates of the most important world currencies will move next week depends on investors’ reactions to the final G20 statement, released on Saturday, which states that the members of that group will not resort to weakening their currencies to increase the competitiveness of their export products in the global market.

This compromise conclusion was reached after the U.S. accused China and some other developing countries of artificially maintaining their currency exchange rates at low levels to boost their exports, while China responded that it cannot allow the yuan to strengthen while the U.S. pursues a very accommodative monetary policy. And while a compromise conclusion was reached regarding exchange rates, G20 members did not accept the U.S. proposal to limit the surplus or deficit on countries’ current accounts to 4 percent, which Americans believe would have a stabilizing effect on currency exchange rates.

Americans have even found themselves under pressure from Germany and China due to the extremely accommodative monetary policy they are trying to use to stimulate economic growth, especially quantitative easing, which has been announced for some time.

“Excessive and constant increase in the money supply, in my opinion, is an indirect manipulation of the exchange rate,” said Rainer Bruederle, the German Minister of Economy. (H)