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Everybody would like China to revalue its currency. Alas, those in power in Beijing will not allow this and few can design a way of making them change their minds. Despite all the collective muscle of the G7 it is incapable of making the fastest growing and ultimately most powerful economy in the world change its mind.
Within Europe the value of the Euro is causing concern but those in Frankfurt with control over short term interest rates are reluctant to cut rates. In the US the value of the dollar has moved from its prominent position in the news at the close of 2003 and has been replaced by both Iraq and the Presidential Election campaign. So, what is happening in the normally turbulent foreign exchange markets?
If we go back to the time when economics was undergoing a sea change and by this I refer to the early 1980’s it was the US who appeared weak. Its federal budget deficit was exploding as Reagan cut taxes and boosted defence expenditure. At that time the US needed close allies to support the value of the dollar. Japanese savings played a large part in maintaining capital flows and some even joked (possibly in bad taste) that Pearl Harbour could never be repeated as the Japanese owned much of what might be bombed! Germany too assisted the dollar and allowed it to move through difficult period. The behaviour of the current administration in Washington leaves one asking if the US no longer considers the impact of its economic policies on its allies to be a major cause of concern when protecting domestic interests.
Today, the US reigns supreme and cares to ignore how a weak dollar impacts on the economies of mainland Europe. I have suggested before that it is the Chinese who the US fears both as a trading power and the only possible ‘superpower’ to emerge as this century proceeds. Maybe Donald Rumsfeld meant that all of Europe was ‘old’ and that it’s Asia who is ‘new’? If this is correct then we are witnessing a significant change in how post war (1945) economics is evolving and we need to think carefully about who is ‘calling the shots’.