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ptirookie
Registered: Aug 2011
Posts: 4 |
03-13-12 09:01 PM
I'm wondering about a sentence - article from The Independent (UK) - that I don't manage to make sense of, it's the following:
"...Long-term US government interest rates - Treasury yields - also dropped, helped not only by the Fed's monetary stance but also by an insatiable demand from the Chinese and other emerging investors as they intervened to prevent their currencies from appreciating excessively."
My question is: How the simple fact to buy a US government bond (albeit in large quantities for the Chinese investors) could be thought as a currency intervention to prevent its value appreciation ?
My guess is, it may not be easy to explain that mechanism. But I would be glad to hear your thoughts about it.
Thank you.
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morganist
Moderator
Registered: Sep 2008
Posts: 3404 |
03-13-12 10:43 PM
Quote from ptirookie:
I'm wondering about a sentence - article from The Independent (UK) - that I don't manage to make sense of, it's the following:
"...Long-term US government interest rates - Treasury yields - also dropped, helped not only by the Fed's monetary stance but also by an insatiable demand from the Chinese and other emerging investors as they intervened to prevent their currencies from appreciating excessively."
My question is: How the simple fact to buy a US government bond (albeit in large quantities for the Chinese investors) could be thought as a currency intervention to prevent its value appreciation ?
My guess is, it may not be easy to explain that mechanism. But I would be glad to hear your thoughts about it.
Thank you.
The interest rate is changed by alterations in liquidity in money supply or increases or decreases in the availability of credit.
By changing the interest rate the availability of credit changes making the money supply a greater or lesser amount which in turn changes its exchange rate through the supply of monetary units. In other words a lower interest rate means more money that can be leant out, this in turn means there are more dollars for other countries to buy making it cheaper against their currency.
So the interest rate is directly linked to exchange rates through this mechanism.
I don't think the comment in the Telergraph is correct. Or at least not correctly described.
I think they are saying that the emerging countries are buying foreign debt to reduce the credit supply in their own country this would stop their currencies from being too strong because the supply of money has not increased domestically because credit has not been expanded in their own country. Also currency has to be exchanged to buy US Treasuries this would reduce the value of the currency of the country that purchased the bonds.
Has that helped?
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ptirookie
Registered: Aug 2011
Posts: 4 |
03-13-12 11:28 PM
Thanks Morgan (& Banjo)
These explanations make sense from a strictly mechanical point of view, which is itself useful.
By way of contrast, to take the example of China (with opaque, obscure accounting and no real credibility in terms of economic reporting), they can use these "double steps": pegging their currency along with buying US Treasuries to reduce their money supply by replacing it with USD dollars and limit the value increase of their currency. But, in their case, as a Communist Dictatorship, why even bother to buy US Treasuries ? They could just as well keep manipulating their currency to maintain it at a low level ? Does that have anything to do with their huge trading relationship with the US and the Rest of the World ?
I don't mean to engage in a complicated discussion about the subject, which I may myself explore.
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morganist
Moderator
Registered: Sep 2008
Posts: 3404 |
03-14-12 12:25 AM
Quote from ptirookie:
Thanks Morgan (& Banjo)
These explanations make sense from a strictly mechanical point of view, which is itself useful.
By way of contrast, to take the example of China (with opaque, obscure accounting and no real credibility in terms of economic reporting), they can use these "double steps": pegging their currency along with buying US Treasuries to reduce their money supply by replacing it with USD dollars and limit the value increase of their currency. But, in their case, as a Communist Dictatorship, why even bother to buy US Treasuries ? They could just as well keep manipulating their currency to maintain it at a low level ? Does that have anything to do with their huge trading relationship with the US and the Rest of the World ?
I don't mean to engage in a complicated discussion about the subject, which I may myself explore.
The Chinese are dependent on American demand. It is called Chimerica.
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Martinghoul
Registered: Jan 2009
Posts: 5641 |
03-14-12 06:44 PM
Quote from ptirookie:
But, in their case, as a Communist Dictatorship, why even bother to buy US Treasuries ? They could just as well keep manipulating their currency to maintain it at a low level ? Does that have anything to do with their huge trading relationship with the US and the Rest of the World ?
China accumulates a large amount of dollars (as well as other ccies), due to its trade surplus with the US (and other countries). It needs to invest these surpluses and the UST mkt is where they do it (for a variety of reasons).
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