If anyone thinks that what the world really needs right now is a weaker Chinese renminbi, do let me know. Yet that is exactly what the markets have delivered this week ...
It seems pretty clear that Bush economic policy is not passing the global test. But the tumbling dollar (it has tracked the renminbi down ... ) has yet to hit the Bush Administration where it would hurt: the price for the ten-year treasury bond needs to start to tumble as well. That just might prompt a much needed reevaluation of the Administration’s second term economic priorities.
My guess is that Europeans were not buying many Treasuries to begin with, so the fall in the euro-dollar is not (directly) hurting the folks who are lending support to the Treasury market. Despite the rise in the Korean won and some other less-than-fixed-but-not-freely-floating Asian currencies, key emerging Asian economies are still providing substantial support to the Treasury market, and probably to other US fixed income markets as well. Let’s see what happened to China’s reserves in q4. Korea’s too.
Speaking of Europe: French Finance Minister Gaymard suggests that the time has come for international policy coordination. I agree. Alas, support from France probably just assures that it won’t happen, at least in the current political environment.
And speaking of coordination, shouldn’t Europe start by coordinating its own message? If France and Germany are worried about the Euro’s strength, why is the Dutch Finance Minister, Gerrit Zalm,( the Dutch currently hold the rotating presidency of the EU) going around saying the ECB should raise rates. Wouldn’t that just increase demand for euros? Eurozone policy coordination is still very much a work in progress. Lower ECB policy rates to support Eurozone demand would be a core component of any sensible plan for international macroeconomic coordination.
European policy makers minds are no doubt focused on oysters and champagne, not international macro, on the day before Christmas. Markets are thin. So I’ll try to keep this post thin too --
Happy Holidays/ Merry Christmas to all.