Forex Reader

– Pushpa Sathish, Staff Writer

As the Reserve Bank of Australia prepares to raise interest rates, the country’s currency is heading to a 10-year high. But that’s not good news for exporters in the country, as we’ve seen so often. But they’re hedging their losses using forwards – a technique in which they buy currency at a particular price on a certain date, and options that allow them the right, but do not require them to buy more.

While traders believe that there’s a 43 percent chance of interest rates rising, a few banks are of a different opinion – they believe the Australian dollar will decline; 37 strategists questioned by Bloomberg said it would drop by 75 cents while National Australia forecasts a decline by 73 cents. Credit Suisse reports that interest rates are expected to increase from the current 6.25 percent after a meeting of policy makers scheduled for Feb 6. IHT reports:

The Australian rate is 1 percentage point more than the U.S. Federal Reserve Board’s target for overnight loans between banks, and 6 points more than the Bank of Japan’s main rate. The yield premium for Australian two-year government bonds over similar- maturity Treasuries reached 1.52 percentage points last month, the highest since July 2005.

– Pushpa Sathish, Staff Writer

China’s State Administration of Foreign Exchange (SAFE) is hoping to “actively promote the basic balance” of the Chinese balance of payments by relaxing rules so that inflows are restricted and outflows encouraged. According to SAFE’s director Hu Xiaolian, this move is an attempt to stop China’s massive foreign exchange reserves from growing further. As the forex amount grows, there’s more pressure from the international community for China to let the yuan appreciate, an initiative, which if taken, will significantly hurt China’s booming export market.

Individuals, banks, companies and insurers will be allowed to hold double the amount of foreign currency than permitted presently, to invest in overseas stock options. On the other hand, short-term capital inflows will be strictly controlled as China tries to bring down its trade surplus. The nation, which is divided over how best to use its large forex reserves, is looking to slow the appreciation of the yuan by diverting foreign funds from the government to the common man.

In another corner of Asia though, such concerns apparently do not exist. While central bankers in the world’s largest continent are alarmed at the large amounts of capital inflows into Malaysia, the country’s second finance minister, Nor Mohamed Yakcop, said that there was no reason to panic. The inflows, which are due to the ringgit’s recent rise, may adversely affect economic and foreign policy, according to the bankers. However, Nor Mohamed said that Malaysia was “very happy” with the fund inflows, and brushed aside concerns that the ringgit’s appreciation would hurt exports.

Different reactions to similar situations! But then, China is way ahead of Malaysia in the foreign exchange game.

– Pushpa Sathish, Staff Writer

Peace and a new currency are coming hand-in-hand to Sudan.  The African nation, hitherto torn by strife between the predominantly Muslim north and Christian south factions, will adopt the Sudanese pound while phasing out the existent dinar. The introduction of the new currency is part of the peace agreement signed two years ago between the north and the south. 

Expected to set the national exchequer back by $150 million, the change will provide an index to measure the growth of the nation’s economy, said the Vice-President of South Sudan. The “Sudani” as the currency will be known, will equal the value of 100 dinars, according to reports from Associated Press.

– Pushpa Sathish, Staff Writer

It’s not enough that China already holds the world’s biggest foreign exchange reserves – the Asian country has just made a net profit of $29 billion from just managing its forex hoard of $1 trillion. At least $44 million of that amount is believed to have come through interest earnings; around 66 percent of the reserves are dollars which bring in an average of 5 percent as interest.

With additional income like this, China is definitely going to turn a deaf ear to American and European voices that call for the appreciation of the yuan. The country’s central bank, the People’s Bank of China, prevents foreign currency from causing local inflation by mandating banks to deposit 9 percent of their reserves with it.

– By Pushpa Sathish, Staff Writer

The London Stock Exchange, NASDAQ, Deutsche which operates the Frankfurt Stock Exchange, NYSE, and the Singapore Stock Exchange have made it to the Bombay Stock Exchange’s (BSE) shortlist of strategic investors for 26 percent of its stock. Only three will make the final cut though, and BSE CEO Rajnikant Patel is playing his cards close to his chest.

The BSE, in an attempt to reduce the number of shares held by brokers, is offering a FDI of 26 percent and a FII of 23 percent, thus allowing a total 49 percent of foreign investment in its stock exchanges, depositories, and clearing corporations. Some equity will also be up for grabs to domestic institutions and banks that do not operate their own brokerages. The stake reduction is expected to be complete by May 2007.

– By Pushpa Sathish, Staff Writer

Is the dollar on its way out as the world’s dominant currency? If you were to take recent events into consideration, it would look that way. The UAE, Russia, Switzerland, and Venezuela are just a few countries that have decreased the dollar holdings in their foreign exchange reserves. China, the world’s largest forex holder, is being urged by analysts and economists to diversify its portfolio, and reduce its risk by dropping the dollars and picking up euros. And to top it all, 2006 saw the British pound appreciating 11 percent against the dollar, while the euro rose 14 percent.

But wait, let’s hear what the defense has to say before pronouncing a verdict. The decrease in dollar holdings by the central banks of various banks is nothing but a move to diversify reserves, and not a sign that the dollar is losing face as currency, says David Powell, currency analyst at IDEAglobal.

The impact on the dollar when central banks invest in other currencies is not lasting and does not influence exchange rates for a prolonged period, according to Edwin Truman, senior fellow at the Petersen Institute for International Economics who served for more than two decades as the director of international finance for the Federal Reserve.

But the explanation that holds the most water is the one that follows – any country that holds a large amount in U.S. Treasury securities will certainly not wish to cause the dollar to decline significantly. China, which holds the second-largest reserve of Treasury securities ($345 billion), will find that selling its dollars ($700 billion) will play spoilsport in its attempts to manage the appreciation of the yuan against the greenback. If the value of the dollar drops too much, China’s exports will become less competitive in the United States, its holdings will decrease, along with the lending ability of its banks.

Nigel Gault, chief U.S. economist for Global Insight, sums it up with these words,

"The dollar is still the world’s No.1 currency, and it’s going to stay that way. The euro is gradually going to become more important, but I don’t see it becoming more important than the dollar."