Tuesday, September 21, 2010

Forex Games

Our decision to invest in a Kindle-3 has been hastened by unexpected macro-economic forces.

Over the last few days, the Japanese government has pumped over $20 billion into the money-markets in a unilateral attempt at lowering the price of the Yen. By spending about Yen 4 trillion a day, it has managed to pull the Yen-$ rates from 83 to 85.

Why is the yen getting stronger against the dollar? Why did Japan have to act unilaterally?

James Saft of Reuters has some interesting answers. In a rather nicely written piece (NYT 17 Sep., `Japan Plays a Game that Others Win`), he explains how China precipitated the ongoing crisis by checkmating the Japanese.

Over the past few months China has been increasing its purchase of Japanese Government Bonds (JGBs) so as to diversify its forex portfolio which is, at present, heavily invested in US Dollar Treasury Bonds. During the same period China has been under pressure from the US to buy more dollars to ease a long-standing criticism about exchange rates that peg the Chinese Renminbi at an artificially low rate to the US dollar.

Now, by buying into JGBs it has triggered a chain-reaction resulting in a sudden spike in Yen-USD rates, due to which Japanese exports are becoming increasingly uncompetitive. To bring down the exchange rates, the Japanese government is buying loads of USDs, helping China continue its high exports riding on a cheap Renminbi...


James Saft, NYT 17 Sep., `Japan Plays a Game that Others Win`

No comments: