Various Countries’ Responses to a Depreciating Dollar

With the U.S. dollar depreciating, thought it would be interesting to capture each country’s reaction and reasons.

Maintaining the peg (i.e. depreciating their own currencies)

  1. China
    1. Maintaining their peg.
    2. Cutting their holdings of U.S. dollars, and increasing their Euro and Yen reserves.

Fighting to prevent appreciation of their currency and losing

  1. Brazil
    1. Imposed a 6% tax in October on foreign investments in stock and fixed income, and on collateral posted by foreigners for fixed income transactions.
    2. Increased foreign reserves by $9.5 billion in October in an effort to curb the currency’s appreciation.
    3. Considering the gradual elimination of the U.S. dollar in trade with China, Russia and India.
    4. JBS SA, the world’s biggest beef producer’s 3Q operating profit dropped 71 percent, partly because of the stronger real. BRF Brasil Foods SA, Brazil’s largest food producer is also affected by the dollar depreciation.
    5. Exacerbated by their high interest rates (attract carry trades) due to their loose fiscal policy.
    6. Brazilian real has strengthened 33 percent this year versus the dollar.
  2. Chile
    1. Increasing local debt sales to finance spending, to allow the government to keep more of its dollar-based savings overseas and slow the peso’s rally.
    2. Chile’s peso has appreciated 26 percent this year vs. the dollar.
  3. Japan
    1. Intervened for 2 days on Sep 15 at around 82 Yen to the dollar, they sold 2.12 trillion yen ($25 billion).
  4. South Korea
    1. Tried to slow the advance of the Won with addition of $63B to its reserves, was trying to defend at 1200, but now letting market forces take over.

Allowing their currencies to appreciate

  1. India
    1. Indian rupee has been up 9% against the dollar in the last 16  months.
    2. Hungry for foreign capital inflows and investments, which helps to boost India’s economic growth.
    3. Exports of non-price sensitive goods and services, e.g. software and pharmaceuticals, and not hard hit.
    4. Exports of price sensitive goods such as textiles are hard hit (losing to competitors in China, Bangladesh, etc.)
    5. Imports of commodities (e.g. oil) are benefiting.
  2. Singapore
    1. Singapore Central Bank is allowing gains in the Singapore dollar to fight inflation.
    2. Economy is operating at close to full employment, labour cost pressures have picked up, and food prices have also risen.
  3. Australia
    1. Has tight labour markets, and moderate inflation, so an appreciating A$ helps with that.
    2. Demand of Australia’s commodities by other countries has also pushed up its currency.
  4. Thailand
    1. Allow its currency to appreciate given its relative economic strength.
  5. Vietnam
    1. Allowing the Dong to appreciate, and not doing anything until Feb 2011.
    2. Depreciation of the Dong would lead further inflation pressure which reached 7.58% at the end of October 2010.

Not Clear

  1. Russia
    1. Increasing their reserves of Yen and Swiss Francs, interested in adding Yuan.
    2. A stronger ruble hurts Russia’s commodity and metals exporters, such as OAO Gazprom, the world’s biggest natural gas producer, and OAO Lukoil, the nation’s largest independent oil company, which sell in dollars, while most of their expenses are in the national currency

Latin America

  1. Nine Latin American countries are banding together to create a new currency, the Sucre, to replace the dollar.
  2. Countries are Venezuela, Bolivia, Cuba, Ecuador, Nicaragua, Honduras, Dominica, Saint Vincent and Antigua and Barbuda.

Some Takeaways

  1. The capital outflow to other countries are hard to stem. There is not only capital flight with existing U.S. dollars, but there are also new borrowers of U.S. dollar at low interest rates to converting that to other currencies for investment (i.e. carry trade). This effectively nullifies the QE done by the Fed because the dollars do not stay in the U.S. but are flooding other countries instead.
  2. The countries worst hit will be the ones with high interest rates (e.g. Brazil).
  3. Having your currency appreciate and hurting your exports, even if you are a net exporting country, may in fact be good, when you have high inflation, tight employment, and production near capacity.
  4. The impact of an appreciating currency on exports also depend greatly on the kind of exports, whether or not they are price sensitive. A country that have export non-price sensitive goods and services will benefit from an appreciating currency because it doesn’t hurt exports much and makes imports cheaper.


s currency must appreciate given its relative economic strength


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