Anthony Hall
With the U.S. Federal Reserve's $600 billion gambit announced Wednesday, the shoe is on the other foot regarding currency exchange rates.
There has been little noise over U.S. currency rate manipulation until lately, when Treasury Secretary Timothy Geithner -- along with leaders from 19 other economic powerhouses -- pledged in South Korea not to enact policies that would tip currency rates favorably and egocentrically toward unilateral gain. The Fed, which completed a $1.7 trillion purchasing program in March, decided Wednesday to embark on another eight-month buying spree, spending $75 billion per month through June, which puts that many more dollars into circulation. The credit line at the central bank is the most enviable kind, as they can do what no one else can do legally, which is to create money out of thin air -- plus trees and ink -- diluting the value of the dollar.
Emerging nations have an interesting complaint: The flood of foreign investment, including funds from the United States is likely to fuel rampant inflation in Brazil, India and China, where central banks have recently moved to slow things down.
The Fed's move has, in fact, the ability to skip right over growth in the United States and spark gains -- even painful or unwanted gains -- in emerging countries.
Remember the loop starts with liquidity in the United States benefiting U.S. corporations, which then hire workers, who spend their paychecks on homes, lawn mowers and furniture and prove the stimulus program worked? Fuhgeddaboudit. Foreign capital is making a bee-line to emerging stock markets at the rate of $2 billion a day, research firm DBS in Singapore said. That's roughly the dollars per hour speed of the Fed's purchasing program.
The latest investment hot spots are not between San Francisco and New York, nor are they in Hawaii and Alaska. When General Motors Co. reports it made a $2 billion profit in the third quarter, as it is expected to do, analysts should be looking at how much of that was generated in Beijing and how much was generated in Boston. South Korea, where Group of 20 leaders are scheduled to meet next week, could be the scene of some complicated double-talk as President Barack Obama reaffirms Geithner's pledge to avoid undermining the value of the dollar in a country GM plans to use as a launching pad for sales in China. Obama, at the same time, is expected to meet with South Korean President Lee Myung-bak to pledge a commitment on a bilateral free-trade accord U.S. lawmakers have yet to ratify.
On Wednesday, Brazilian trade commissioner Walber Barral said the Fed's purchasing program could "prompt retaliatory measures," The New York Times reported. In Thailand, Finance Minister Korn Chatikavanij said its central bank and "neighboring countries" were planning moves "to curb possible speculative money flowing into the region."
But HSBC analysts Richard Yetsenga and Pablo Goldberg in a research note said, "The tide generated by the liquidity from abroad is bigger than whatever wall emerging market countries can put up."
For all the rhetoric, investors are able to cast votes on every market day and markets made gains Thursday in Asia and Europe. The Nikkei 225 index jumped 2.17 percent while the Shanghai composite index added 1.85 percent. The Hang Seng index in Hong Kong rose 1.62 percent while the Sensex in India added 2.09 percent.
In Australia, the S&P/ASX 200 gained 0.48 percent.
In midday trading in Europe, the FTSE 100 index rose 1.74 percent while the DAX 30 in Germany gained 1.61 percent. The CAC 40 in France rose 1.91 percent while the Stoxx Europe 600 added 1.41 percent.
