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Treasury Department: Semiannual Report on International Economic and Exchange Rate Policies, October 2009

Published October 15, 2009

The U.S. Department of the Treasury released this semiannual report on October 15, 2009; it covers the first half of 2009.

The key findings section states,

"The Omnibus Trade and Competitiveness Act of 1988 (the “Act”) requires the Secretary of the Treasury to provide biannual reports on the international economic and exchange rate policies of the major trading partners of the United States. Under Section 3004 of the Act, the report must consider whether any foreign economy manipulates its rate of exchange against the U.S. dollar to prevent effective balance of payments adjustments or to gain unfair competitive advantage in international trade. For the period covered in this Report, January 1, 2009 to June 30, 2009, Treasury has concluded that no major trading partner of the United States met the standards identified in Section 3004 of the Act.

The Report further finds that the financial crisis that began in the summer of 2007, and intensified in the fall of 2008, was especially severe in the last quarter of 2008 and the first quarter of 2009. The International Monetary Fund (IMF) has estimated that global real GDP declined at an average annual rate of 6.5 percent during the first quarter of 2009 and international trade fell sharply, contracting at an annual rate of 54 percent. Industrial production is estimated to have declined by 18 percent. By early March 2009, global equity prices were down by 60 percent from their peak in October 2007. On a nominal effective basis, the dollar strengthened 5.9 percent in the fourth quarter of 2008 and a further 3.7 percent during the first quarter of 2009 as risk appetite fell sharply. There was widespread agreement that the crisis represented the greatest economic challenge in more than a generation, and there was growing concern that the world economy could be on the edge of a new depression.

On April 2, 2009, Leaders of the G-20 met in London and pledged to do “whatever is necessary” to restore confidence, growth, and jobs; repair the financial system and restore lending; and maintain the global flow of capital. Pledges were made to deliver extraordinary fiscal and monetary stimulus and financial sector support – the largest and most comprehensive global stimulus program in modern times. In addition, G-20 Leaders pledged to make available an additional $850 billion to international financial institutions to support emerging markets and they committed to a substantial strengthening of financial market regulation and supervision.
The U.S. Administration, together with the U.S. Congress, had already begun taking exceptional action to arrest the economic decline with emergency demand support measures under the February 2009 $787 billion American Recovery and Reinvestment Act (ARRA). This was buttressed by the Administration’s Financial Stability Plan (FSP) to strengthen credit, housing, and financial markets, and by the joint Treasury/Federal Reserve bank stress tests conducted under the Supervisory Capital Assessment Program (SCAP). Virtually every G-20 member country and all the economies listed in this Report have put in place exceptional monetary and fiscal measures to bolster demand and support a rejuvenation of growth.

These forceful interventions on a coordinated global scale worked. In the few months following the April Leaders’ meeting, global economic growth turned positive, industrial production bottomed and began increasing, international trade increased 10.2 percent, financial markets improved sharply as interest rate spreads declined and access to credit broadened, and consumer and business confidence improved. Globally, capital began flowing once again as risk aversion began to dissipate. As moderation in downside risks prompted global investors to once again shift their portfolios toward more risky assets, the dollar retraced some of its previous rise.

Despite the recent improvements in financial markets and economic growth, the global economic recovery remains incomplete. Private-sector demand remains weak and unemployment in many countries remains unacceptably high. To help guide the recovery and to reduce the risk and incidence of future crises, G-20 Leaders agreed at the Pittsburgh Summit on September 24-25 to launch a new Framework for Strong, Sustainable, and Balanced Growth. The goal of the Framework is to help to ensure a better balanced global economy that is less prone to crisis and to secure the ability to quickly mobilize early intervention in the event of prospective instability. As part of the Framework, G-20 members with sustained, significant external deficits pledged to undertake policies to support private savings and fiscal consolidation while maintaining open markets and strengthening export sectors. G-20 members with sustained, significant external surpluses pledged to strengthen domestic sources of growth. The G-20 will establish a process of mutual assessment to help evaluate the sustainability of policies and develop corrective actions where necessary.

As noted, no major trading partner of the United States met the standards identified in Section 3004 of the Act during the most recent reporting period. All of the countries described in this Report have put in place policies to boost their economies and expand domestic demand. Global imbalances have fallen sharply during the crisis from a peak of 5.9 percent of world GDP to an IMF-estimated 3.6 percent in 2009. The U.S. current account deficit has fallen from a peak of 6.5 percent of GDP in the fourth quarter of 2005 to 2.9 percent of GDP in the second quarter of 2009. Most U.S. bilateral trade deficits have fallen as well. Some of the correction in global imbalances is the result of cyclical factors and may be reversed as the global economy recovers. However, some is also structural – as with the rise in private sector saving in the United States.

Of the 17 currencies examined in this Report, two (the Saudi Arabia riyal and the Venezuelan bolivar) are fixed against the U.S. dollar. Among the remaining 15 currencies, all except the Norwegian kroner depreciated against the dollar in the first quarter of 2009, as capital flows to emerging markets declined and investors continued to shift their portfolios into dollar assets. During the second quarter of 2009, 14 of these currencies appreciated against the dollar, as improvements in financial market conditions and the global outlook led to a return to more diverse portfolios. Only the Chinese renminbi remained unchanged against the dollar in the second quarter. This lack of movement of the renminbi has contributed to upward pressure on more flexible currencies in the region. Several emerging markets in the region have intervened in the foreign exchange market to slow the pace of appreciation.

Although China’s overall policies played an important role in anchoring the global economy in 2009 and promoting a reduction in its current account surplus, the recent lack of flexibility of the renminbi exchange rate and China’s renewed accumulation of foreign exchange reserves risk unwinding some of the progress made in reducing imbalances as stimulus policies are eventually withdrawn and demand by China’s trading partners recovers.

On an effective basis, the renminbi has depreciated 6.9 percent since February 2009. From the end of February through June, China’s reserves increased both as a result of valuation changes and additional purchases associated with intervention. Both the rigidity of the renminbi and the reacceleration of reserve accumulation are serious concerns which should be corrected to help ensure a stronger, more balanced global economy consistent with the G-20 Framework. Treasury remains of the view that the renminbi is undervalued. The United States will continue to work with China both in the G-20 and the bilateral Strategic and Economic Dialogue to pursue
policies that permit greater flexibility of the exchange rate and lead to more sustainable and balanced trade and growth.

Appendix 1 of the Report provides data on the currency composition of reserves over the past 30 years. Despite repeated predictions of the demise of the dollar as the major reserve currency, the data show no significant diversification of global currency reserves away from the dollar.
Appendix 2 of the Report, required by the Supplemental Appropriations Act, 2009, Public Law No. 111-32 (June 24, 2009) focuses on how to improve the effectiveness of IMF surveillance. Rigorous bilateral and multilateral surveillance by the IMF will help shed light on trends that could lead to the next unsustainable boom and allow preventative or corrective measures to be put in place. Under the G-20 Framework for Strong, Sustained, and Balanced Growth, the IMF will provide forward-looking analysis of whether the world's major countries are implementing economic policies, including exchange rate policies, which are collectively consistent with G-20 objectives."

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