History strongly suggests that the character of relations among major powers is a key determinant of stability. Europe convulsed in continuous warfare until France and Germany came to terms after World War II. Only then did Europe enjoy the prospects of integration leading to the European Union.
Amid light news, the downward pressure on the US dollar has continued against the majors but emerging market currencies are a mixed picture. The key driver is the spate of comments from the Fed’s Fischer, the ECB’s Draghi, and BOJ’s Kuroda.
Fischer indicated that he agreed with the majority that a Fed hike this year might still be appropriate. However, he tempered his remarks by the caveat that it was an expectation, not a commitment.
There is a sense that the markets are at crossroads. Many suspect, there has been a trend change. The reason for many to buy the dollar was the Fed was going to raise interest rates. Lift-off may not be simply postponed until December, as was the decision to begin tapering, but a growing number of participants do not see it until March.
The recent Trans-Pacific Partnership agreement presents Asia with good, bad and ugly scenarios.
Had the TPP failed, that would have been a severe blow to the credibility of the United States in Asia. Yet, it excludes Asia’s largest economies – China, Indonesia and India.
Not a game changer but vital to US credibility
The US dollar is on its back foot. It was already sporting a softer bias and the FOMC minutes had a dovish twist. A Wall Street Journal poll found 64% of economists expect a hike in December, and while the minutes might not substantively change that, the confidence is weak.
As of October, fifty-one prospective founding members signed the China-initiated Asian Infrastructure Investment Bank (AIIB) Articles of Agreement, which expects to be operational by the end of 2015. China has generally been cooperative with and supportive of Bretton Woods multilateral institutions. At the same time, it is frustrated that the existing multilateral institutions set the limits for its global ambitions. The slow pace of reforms at the Western-dominated IMF and World Bank prevents China and other emerging economies from playing a bigger role in international political economy.
The US dollar has eased to new lows for the week against the euro and yen. There does not seem to be a big fundamental driver. If anything the weakness in German exports, following as it does the soft orders and industrial output data, warns the European locomotive may be slowing, and would seem to be euro negative.
Increasingly reliant on each other for sustainable economic growth, the United States and China have fallen into a classic co-dependency trap, bristling at changes in the rules of engagement. The symptoms of this insidious pathology were on clear display during Chinese President Xi Jinping’s recent visit to America. They did not accomplish much, and the path ahead remains treacherous.
On Monday, October 05, 2015, the United States and 11 other Pacific Rim nations reached a final agreement on the largest regional trade accord in history. Now, the treaty needs approval from Congress, and many analysts fear this could be the toughest fight of President Obama’s final year in office.
Since the Federal Reserve left rates on hold on September 17, the dollar-bloc currencies have outperformed the euro, yen, and sterling, all three of which are lower against the dollar. So far this week the New Zealand dollar is the strongest, rising 2.8%, followed by the Australian dollar’s 2.1% gain. The Canadian dollar is up 1%.
