Dodge Ball

It’s not that hard.  You throw the ball.  You hit someone. 

Unless, of course, they dodge it. 

The relationships between major currencies is always an issue in geopolitics and global trade.  The U.S. has stated very clearly that we look unfavorably upon currency manipulation as a means to bolster foreign trade.  At least when it comes to the currencies of our trading partners.

Here’s a problem with dodgeball; when you throw the ball, it causes your opponent to react (i.e. dodge it).  It seems sort of silly to complain (“hey that’s not fair!”).  What do you expect?  If you have two or more players, you are going to have action and reaction. So it goes with currencies, and monetary policy. 

After a decade of an ultra-low interest rate policy being pursued by major central banks globally, our Federal Reserve has embarked on a rate hiking cycle.  How have our opponents reacted?  Currently, the interest rate on our 10-year government bond has a yield of approximately 3.2 percent.  Compare that to Japan at 0.15 percent or Germany at 0.55 percent.  The proverbial ball has been thrown and large pools of money are moving, naturally seeking a better return.

With much better yields, the U.S. compares quite favorably to that of most every other developed, politically stable countries.  It is only natural that large sums of liquidity will gravitate toward U.S. currency, especially when we are selling such large quantities of government bonds (at least $140 billion just this week alone).  How do foreign entities do this?  By selling their currency (driving the price down) while buying ours (driving the price up).  

The net effect looks a lot like currency manipulation.  But it’s not.  Actually, we are the ones moving and when our toss misses the intended target, we cry foul, branding them as currency manipulators.  But to some extent, we are the manipulators.  Dodgeball isn’t as easy as it looks after all.  (by J R)