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Showdown at the Dollar Corral

Scott Jagow Nov 16, 2009

The US and China are walking off their paces in a standoff over the dollar. Can you seen the tumbleweed rolling by? The Federal Reserve chairman rarely makes public comments about the value of the dollar, but Ben Bernanke did so today. And the Chinese did too.

Here’s what Bernanke said in a speech to the Economic Club of New York:

We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.”

I know thems not exactly fightin’ words, but Bernanke is saying that while the Fed is watching for signs of inflation, there’s no compelling case yet for raising interest rates. You hear that, China? Here’s what the Chinese said earlier, from the Wall Street Journal:

Liu Mingkang, chairman of the China Banking Regulatory Commission, said that a weak U.S. dollar and low U.S. interest rates had led to “massive speculation” that was inflating asset bubbles around the world. It has created “unavoidable risks for the recovery of the global economy, especially emerging economies,” Mr. Liu said. The situation is “seriously impacting global asset prices and encouraging speculation in stock and property markets”…

Actually, those do sound like fighting words. But China needs to keep this in mind:

China is particularly affected by the U.S. policy to keep interest rates at near-zero because it has kept its own currency, the yuan, largely pegged to the dollar. Key trading partners like the U.S. and European Union have urged China to let its currency appreciate, and multilateral agencies like the World Bank and International Monetary Fund have said a stronger yuan would help avoid risks of asset bubbles, in part because that would make it more expensive for outsiders to buy Chinese assets.

The Fed believes it is protecting the US economy by keeping interest rates low. China – America’s largest creditor – sees those rates as a threat to its economy. Something has to give, doesn’t it? Or maybe my Wild West analogy is inaccurate. Here’s how President Obama sees it:

“I know there are many who question how the United States perceives China’s emergence, but as I have said, in an interconnected world, power does not need to be a zero-sum game, and nations need not fear the success of another.”

It just seems that they usually do.

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