Global Currency War - REUTERS - 2010-10-06

8/8/2019 Global Currency War - REUTERS - 2010-10-06

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OCTOBER 2010

GLOBAL CURRENCY WAR

The global currency story is heating up. The Bank of Japan goes hell for

leather back to zero rates; emerging markets protest as their currencies

surge; the IMF warns against currency wars. Policy disarray? Where

does it all end? The answer is look for more dollar weakness and

currency controls. Reuters gives an in-depth look at the options.


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CURRENCY WAR OCTOBER 2010

ANALYSIS

G20 proximity talks neededto avert Forex war

By Mike DolanLONDON, Oct 6

CREuL calibration of a u.S. dollar de-valation looks to be the only way to avertthe sort of crrency war agged by Brazil

and others, leaving G20 powers the nenviabletask of agreeing some control of the process.

The top world economies, shaken by three yearsof nancial trmoil, are scrambling to cap orweaken their crrencies in a ght over fragileglobal demand for exports prompting retalia-tory capital crbs and damaging trade rows.

s G20 nance chiefs prepare to meet on Oct.22, they are no closer to resoltion of the dec-ade-old bgbear of global imbalances betweenexport-driven economies mostly develop-

ing nations sch as China, bt also Japan andGermany and the big global consmers, theunited States, Britain and elsewhere.

While there have been loose agreements onrebalancing over time where emerging powersallow crrencies to rise gradally the lack ofan agreed bleprint to manage the transition isalready prompting nilateral actions and tit-for-tat reactions in a febrile economic and politicalenvironment.

aced with scal exhastion, hostile electoratesand booming Chinas refsal to allow a rapid riseof the yan, the u.S., Japan and possibly Britainseem set on another bot of money printing toreboot their ailing economies and weaken theircrrencies.

G20 needs framework for orderly

dollar devaluation

Emerging FX revaluation hard to

avoid given ows, US QE

Hot money, portfolio ows risky,

but FDI surging too

Source: Thomson-Reuters Note: Rates and prices as of Wednesday 0600 GMT

U.S. DOLLAR WEAKENS

1.6

1.5

1.4

1.3

1.2

1.1

105

100

95

90

85

80

EURO TO DOLLAR YEN TO DOLLAR

M J J A S O N D J F M A M J J A SAMFJ

2009 2010

HIGH - Nov. 25: 1.514

LOW - June 7: 1.191

HIGH - Apr. 6: 100.98

LOW - Sep. 14: 83.05

Oct. 6 83.12

Oct. 6 1.384

1,400

1,300

1,200

1,100

1,000

900

800

GOLD PRICES

Daily close in dollars per ounce

2009 2010

LOW - Jan. 14: 810.35

Dec. 2: 1,214.55

Oct. 6 1,347.05

CURRENCY EXCHANGE RATES Daily close

5

4

3

2

1

0

WORLD INTEREST RATES

2009 2010

4.5

1.0

0.750-0.250.1

Australia(RBA cash rate)

Canada(BoC over-night rate)

U.S.(Fed fundsrate)

Japan(Overnightcall rate)

Eurozone (Refi rate)

ast-growing developing contries with exibleexchange rates are caght in the crossre andare reacting fast, leading to Brazil on Mondayto doble taxes on foreign inows and SothKorea on Tesday to threaten crbs on crrencytrading.

rance, which takes G20s rotating chair next

month, has denied weekend reports of secretnegotiations with China. Bt its clear that pa-tience in the stats qo is rnning ot.

To avoid the damaging conseqences ofcontined nilateral action ... a core grop of


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major economies needs to agree rgently on amltilateral and coordinated package of policymeasres, Charles Dallara, director of bankinggrop the Institte for International inance,said on Monday.

u.S. trade threats against China over the yanshowed the conterprodctive natre of nilat-eral policy, Dallara said in an open letter to theInternational Monetary nds annal meeting.

LL HNDS TO THE PuMP

The main problem for emerging economiesis mch of the freshly minted core liqid-ity, chased away by depressed western inter-est rates, is owing to higher overseas retrns

rather than strapped rms and hoseholds inmerica or Japan.

Their bind is a choice between standing backand accepting export-stnting crrency srgesand asset bbbles or to resme heavy interven-tion or capital controls that lead to inationheadaches or frther trade distortions.

Robert Johnson, director of the Soros-fndedInstitte for New Economic Thinking, said G20needs agreement on the size and pace of thecrrency shifts between three main grops the

united States and major consmers; the bigexporters of China, Japan and Germany; and agroping of emerging exporters.

There is competitive devalation going on,said Johnson, a former director at billionaireGeorge Soros fnd management rm andformer economist at the u.S. Senate BankingCommittee.

What is called for here is a realignment ofemerging contries exchange rates vis-a-vis the

developed contries maybe 20-25 percent ap-preciation over the next year or two.

What emerging economies lose on export com-petitiveness, he reckons, they can recaptre atleast partially in cheaper imports for their grow-ing middle class of consmers.

The tricky bit is how to get everyone to movetogether and prevent market prices snowballingor governments overreacting.

Left to their own devices markets are nlikely to

deliver the gradalism desired by most govern-ments and faith in efcient pricing is at a lowebb after the credit crisis.

nd, reading the rnes well, money managersalready see the opportnity and are stacking

bets to exploit rising pressres.

EMERGING X RuSH

David Shairp, strategist at JPMorgan ssetManagement, reckons the move to emerging

crrencies cold now accelerate.

One of the implicit aims of liqidity injectionsby the core G4 is srely to facilitate a weakeningof their crrencies, he told clients this week.

Portfolio ows to emerging market eqities arebooming and emerging market debt denomi-nated in local crrency is crrently one of thehottest xed-income plays.

ccording to fnd tracker EPR, emergingmarket bond fnd inows, with local crrencymandates taking more than half, have soared toalmost $40 billion so far this year from less than$700 million in the rst nine months of 2009.

Net ows to emerging market eqities in thethird qarter, at more than $30 billion, weresome 50 percent p on the rst six months ofthe year. nd year-to-date inows of almost $50billion compare to a net exit from developed eq-ity fnds of almost $79 billion and an otowof half a trillion from western cash fnds.

The speed and stability of these portfoliostreams may be a legitimate concern, btlonger-term ows play the same tne.

ThomsonReters data shows emerging marketmergers and acqisitions this year, at $480 bil-lion, were p 63 percent on the same period of2009.

Crcially, this is not hot money.

No one is sleeping on the job, Brazils nance

minister, Gido Mantega, said on Monday. Werisk having a trade war and thats the worry.(Bt) it is preferable that we take coordinatedmeasres instead of isolated measres.

(Editing by Ssan enton)

CLICK FOR

INTERACTIVITY
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By krishna kuMar

SYDNEY, Oct 6

D

EELOPED contries have to do whatit takes to revive economic growth, andthat means sian contries are going to

have to learn to live with crrency appreciation.

Even as sian athorities cling to interventionas a tool to limit that appreciation pressre, thelaws of economics mean that robst emergingmarkets are a natral destination for capitalseeking higher yields.

With sia in need of capital and foreign directinvestment, contries will allow the fnds tokeep poring in as the ederal Reserves moneyprinting and drive to psh down Treasry yields

send capital away from the greenback.

Bt Chinas relative inaction on the yan keepsregional athorities catios abot apprecia-tion in their own crrencies on fears of losingexport competitiveness, leading to dollar-byingintervention.

That intervention will only reslt in more down-ward pressre on the dollar as sian centralbanks now rotinely shift a portion of their dollarprchases into the ero and other crrencies,

creating something of a vicios circle.

The other risk is that if Grop of 20 contries donot come to some compromise at the pcomingmeeting in Soth Korea, the dollars slide coldget disorderly and lead to more neven re-sponses by emerging economies grappling withstronger crrencies.

sharper dollar selloff cold raise risks for bigholders of u.S. Treasries.

This trend can only be stopped by two factors.

irst, a rebond in major economies, especiallythe united States, that will lead to higher inter-est rates and capital heading back to those

FX COLUMN

asia needs to learn to livewith appreciation

Trade weighted exchange rates

Sources: Thomson Reuters Datastream, JPMorgan

Reuters graphic/Scott Barber

06/10/10

JPMorgan trade weighted indices - rebased to 100

200760

70

80

90

100

110

120

130

140

150

IIIII

Japan - Yen

Brazil - Real

Europe - Euro

U.S. - Dollar

UK - Sterling

China - Yuan

2008 2009 2010 2011

contries. Bt the chance of that happening overthe next year appear remote.

Second, a concerted psh by all contries inthe G20 to get China to act on the yan. Chinaseems mindfl of this risk and is garnering sp-

port from nlikely candidates, sch as rance, inthe gise of crrency stability.

unless the yan is allowed to appreciate againstthe dollar and against a basket of crrencies, the

sitation is not going to change. Keep in mindthat China netralises any yan rise against the

dollar by bying eros, and lately other siancrrencies, to keep the yan stable.

unlike in the lead-p to the 1997-98 sian nan-

cial crisis, central banks have this time taken aproactive stance on monetary and scal policy

that shold allow them to withstand any disrp-

tive hot money ows.

s the worlds growth locomotive, emerg-ing asset markets are offering solid retrns in

comparison to the developed world. With a war


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chest of crrency reserves, sian athorities arefar better placed to weather sdden crrencyotows.

Contries sch as India and Indonesia can

channel these fnds into proper infrastrctreand development projects, rather than the golfcorse boom that occrred dring the sia Tigerdays in the mid-1990s.

It is time for these contries to live p to theirnew fond role of being the locomotive for worldgrowth. This will serve them better than expect-ing developed economies to help them at theslightest sign of troble.

Two ways to play strong sian crrencies are via

the Philippine peso and the Soth Korean won.

uSD/PHP is qickly zooming in on the 42.55level, the 76.4 percent retracement of its spikedring the nancial crisis, from near 43.45 now.

s for the won, uSD/KRWs path higher iscomplicated by the Bank of Koreas repeated in-terventions to stem the rise. Bt beyond the 1,115minor spport line, the pair is heading towardsthe 1,110 level the 200-week moving average and then major spport at this years low of1,102 toched in pril.

sstained break of 1,102 targets 1,062, the76.4 percent retracement of uSD/KRWs spikedring the nancial crisis.

Krishna Kmar is a Reters X analyst. Theviews expressed are his own (Editing by Eric Brroghs & Kaznori Takada)

Expectations for QE support gold, hit dollar

Source: Thomson Reuters Datastream

Reuters graphic/Scott Barber

06/10/10

0

1

2

3

4

OSAJJMAMFJ1000

1100

1200

1300

1400

OSAJJMAMFJ2010 2010

Implied 3 month interest ratesbased on Dec 2011 contracts

Percent Gold price - $ per ounce

UK Euro U.S. Switzerland Japan

Gold pushed to a fresh record high just below the key $1,350 level on Wednesday, riding on dollar weaknessand market anticipation that the U.S. Federal Reserve may ease policy to stimulate economic growth.

75

80

85

90

95Dollar index

The imagethat comes to

mind is that oftwo men in arowboat withone of thembailing it otas the otherdrills holes init. EdRombach,Reters Credit

nalyst, on theBOJs move toby moreassets andkeep interestrates virtallyat zero.
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Q+A

will BoJs comprehensiveeasinG work?

6

By rie ishiguroanD stanley WhiteTOKYO, Oct 6

THE Bank of Japan pledged to pmpmore fnds into the strggling economyand keep interest rates virtally at zero,

srprising markets and stealing a march on the

ederal Reserve in providing a fresh dose ofeconomic stimls.

ollowing are key qestions and answers abotthe array of steps annonced by the BOJon Tesday.

WILL IT WORK?

nalysts agree the BOJ was more creative andbolder than had been expected with what thecentral banks governor, Masaaki Shirakawa,

called a comprehensive monetary easing.

That explained the yens initial fall against thedollar. However, investors are also looking atwhat wasnt inclded, which explains the sbse-qent rise in the yen.

Yes, the central bank will by Japanese govern-ment bonds sing cash from a 5 trillion yen($60 billion) fnd. Bt it is keeping its ceiling onprchases of long-term JGBs nchanged, whilemaking the new fnd an exception to this rle.The ceiling will contine to match the vale of

money in circlation.

30 trillion yen loan scheme is also nchanged.

The 5 trillion-yen pool of fnds is designed toby p varios assets, inclding governmentdebt, exchange-traded fnds and real estateinvestment trsts. The BOJ hopes that will pshdown long-term rates.

Bt the amont is jst a fraction when measredagainst total government bonds otstanding

of 904 trillion yen, sggesting its impact maybe limited. That may explain why 30-year bondyields rose after the BOJ annoncement.

The decision to ct its policy rate to a range ofzero to 0.1 percent from 0.1 percent seems to

have limited scope since the BOJ will still set a

oor for money markets by offering interest onexcess reserves of 0.1 percent.

slightly lower policy rate is nlikely to boostloans demand anyhow. The balance of otstand-ing loans in Japan has fallen from a year earlierfor nine straight months.

The BOJ special loans scheme has seen rea-sonable demand bt has had little impact onmarket rates.

So the ct in the policy rate was more a symbol

of the BOJs intent by sggesting it will maintainvirtally zero rates ntil price stability is in sight.In other words, rates will stay at these levels n-less deation is licked.

The BOJ may have srprised with its policyeasing, bt any benets may qickly be n-done becase the ed is expected to follow sitshortly with fresh measres to stimlate the u.S.economy, weighing on the dollar and liftingthe yen.

That may explain why the BOJ was not as ag-gressive as some had hoped. It still has toolsin its monetary policy kit jst in case the fall inindstrial prodction and slide in exports growthgathers momentm and pshes the economyback towards another recession.

Japan shoulders burden of FX strength

Sources: Bank for International Settlements, Thomson Reuters. 06/10/10

Nominal effective exchange rate indexes rebased, Jan 2008 = 100

70

80

90

100

110

120

130

140

201020092008

Europe since midst of crisis enjoys relatively weak currency

Japan

U.S.

ChinaBrazil

Europe


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WHT POLICY OPTIONS RE LET?

The BOJ cold retrn to fll-blown qantitativeeasing (QE) rst adopted nearly a decade ago,targeting the amont of banks crrent accont

deposits at the BOJ instead of interest rates.

However, the BOJ is not convinced the policywas that effective so it will be relctant to adoptQE again. The abndant spply of fnds nderQE did little to encorage an increase in capitalspending, or therefore bank lending, becaseof pessimism abot the economy and strctralproblems of the banking system.

Other options; it cold expand the amontand range of assets it prchases via the newfnd, sch as inclding asset-backed secrities

backed by loans to small bsinesses. That coldbe more effective becase small bsinessesemploy 70 percent of Japanese workers.

Shirakawa said on Tesday that the BOJ coldconsider expanding the fnd if necessary.

The BOJ cold expand its xed-rate fnding toolagain, althogh sch a decision cold be metwith scepticism given the limited effect of thefacility so far.

nother option is to stop paying 0.1 percentinterest on excess reserves. This wold forcebanks to think twice abot what to do with thecash by eliminating their incentive to park it atthe central bank.

WHT HS CHNGED SINCE THE BOJ LSTDOPTED QE?

When the BOJ introdced qantitative easing in2001, Japan was in a nancial crnch. The BOJforce-fed money into the banking system, btwidespread pessimism abot the economy pre-vented any signicant pick p in loan demand.

Banks were relctant to boost lending anyhowbecase they were saddled with hge non-per-forming loans. The economy eventally recov-ered thanks to a rebond in the global economy.

Still, QE helped stabilise the nancial systembecase the extra money acted as a bffer foremergency fnding against events sch as a rnon bank deposits.

It also effectively accommodated Japans heavyyen-selling intervention that lasted for 15months ntil March 2004 and amonted to 35trillion yen.

ast forward to 2010 and Japans nancialsystem is relatively healthy and in little need of asafety net.

Bt the global economic sitation is very dif-ferent. Developed economies are sffering andvying to weaken their crrencies.

In addition, the ederal Reserve and the Bankof England are condcting qantitative easing,limiting the yen-weakening effects of Japansmonetary policy. So the BOJ may yet be forced

down the road of fll QE.

WHT IS THE GOERNMENT DOING TO HELPTHE ECONOMY?

The cabinet is considering an extra bdgetworth arond 4.8 trillion yen ($57.7 billion) tostimlate the economy, a level roghly matchedby the BOJs 5 trillion yen pool of fnds.

It is ncertain how qickly the bdget can be-come law becase the government wold need

opposition spport and so far the opposition hasbeen lkewarm to the idea.

dditionally, the economic impact may not beimmediate becase mch of the spending isaimed at spporting the social safety net.

The government aims to raise the fnds withottapping bond markets, arging it can sqeezemoney ot of reserves created by lower-than-expected interest payments on debt and a taxrevene windfall. Still, the government will facepressre to increase stimls and isse new

bonds from some members of the rling partywho favor more spending.

(Editing by Edmnd Klamann and Neil llick)

Yen strong relative to NEER trend

Sources: Bank for International Settlements, Reuters calculations.

*NEER = Nominal effective exchange rate

06/10/10

Percent of NEER* index over/below long-term mean Country

Japan

Australia

China

Euro Zone

U.S.

Brazil

Britain

India

South Korea

-25 -20 -15 -10 -5 0 5 10 15 20

South Koreas won stays weak compared to its peers

18.99

14.17

10.13

6.64

-6.69

-12.38

-13.29

-17.21

-22.50


8/16


By eric Burroughs, asia Financial Markets eDitorHONG KONG, Oct 6

OR all the talk abot crrency wars andcompetitive devalations, the only cr-rency really being devaled is the u.S.

dollar.

sian interventions to block the dollars slide estimated at nearly $20 billion last week is setto contine and will be a factor helping to boostboth the ero and u.S. Treasries in comingweeks, with the occasional short-covering brstonly temporarily taking pressre off the athori-ties. In this way it is easy to forget sias role inproviding liqidity to global markets.

Most central banks in the region have, indeed,started raising interest rates.

llowing a certain amont of crrency strengthhas also been a tightening tool.

Bt stepped p X intervention in recent weekshas led to an increase in X reserves that ap-pears to be being fnneled back into u.S. Treas-ries, besides the sal minor degree of diversi-cation. Jst look at the increased accmlationof X reserves in the past few months.

nd then look at the soaring increase in foreign

central bank holdings of Treasries, now rn-

ANALYSIS

asias interventionBandwaGon

8

ning at close to the record levels reached in thepost-Lehman environment when everyone wasscrambling to hold dollars.

This comes jst as dollar-centric Japan hasstarted an intervention campaign.

While the Ministry of inance appears to havegone silent since the initial brst of yen-sellingtotaling abot $23 billion, jst abot every mar-ket participant expects them to step back in.

The dollar is strggling, and emerging marketcentral banks are opting to block the pwardpressre on their crrencies by bying dollars

and recycling a sizable chnk of those back

The dollarsell-off mayaccelerate as

the u.S.economydeteriorates,sending the yento 50 in 2011 -one of the mostbearish callsin the market,by SMBCschief strategist,Daiske uno

Asia FX reserves ex China, Japan keep growing

Sources: Central banks from Indonesia, Malaysia, Philippines, South Korea, Taiwan & Thailand 06/10/10

$ bln

0

100

200

300

400

500

600

700

800

Combined reserves of Indonesia, Malaysia, Philippines, South Korea, Taiwan & Thailand

2003 2004 2005 2006 2007 2008 2009 2010

Aug 2010$670.7 bln
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9/16


into Treasries.

sian athorities are starting to see someleveling ot of export growth, perhaps makingthem more catios on crrency strength.

So even before the ed makes any decision onboosting its own Treasry prchases, the dollarsslide is prompting sian and other central banksto intervene and then do the same.

That liqidity injection and the reslting down-ward pressre on Treasry yields may not yet behelping to kindle solid growth or employment inthe united States.

Bt it does mean there are plenty of investors

scoring the world looking for retrns and por-ing that money into emerging markets.

sias intervention does mean governments arehaving a heavy hand in X markets, and Japanmay be forced to intervene again after a hiatsof more than two weeks.

Bt sia is only slowing the rise in its crren-cies, still among the biggest gainers in emergingmarkets this year and now getting a tailwindfrom the rising yan.

Even with the action to block the advance,strong regional growth, boyant eqity marketsand rising interest rates mean capital will chaseretrns both in these XJ markets and otherssch as stralia.

Looking at both long-term NEER and REERvales, most XJ crrencies are still wellbelow their sia crisis peaks, especially theIndonesian rpiah.

bot the only factor looking to help the uSD

in the near-term is the very oversold natre ofthe move, with the 14-day RSI at jst 20.9 thelowest since the greenback hit a record low inMarch 2008.

It will be a long month for the dollar ntil theed delivers its verdict in early November,

9

ESTIMATES OF DAILY ASIA CENTRAL BANK FX INTERVENTION

DATE BOK BNM BI BOT BSP CBC TOTAL

5 Oct 500 100 50 300 950

4 Oct 1,500 600 100 300 450 500 3,450

1 Oct 3,000 900 850 500 600 500 6,350

30 Sept 900 700 700 150 150 200 2,800

29 Sept 2,200 900 800 300 1,100 500 5,800

28 Sept 500 50 200 150 50 300 1,250

27 Sept 900 800 300 100 200 300 2,600

TOTAL 9,500 3,950 2,950 1,600 2,600 2,600 23,200

Estimated daily totals in millions of dollars

Central banks:BOK Soth Korea BI Indonesia BSP PhilippinesBNM Malaysia BOT Thailand CBC Taiwan

Sorce: IR Markets

and remarks from New York ed President BillDdley made clear the case for more qantita-tive easing.

The ed will do what is necessary to achieve its

dal mandate of price stability and strong em-ployment. If that means printing more dollars,yo can bet more dollars are on the way.

Brazil and other contries can gripe, and Chinacan play p its prchases of Greek bonds.

Still, ntil we see clearer signs of the weak u.S.recovery accelerating this dollar downtrendis likely to stay in place and sian athorities,among others, will tolerate some crrencystrength with the occasional rries of interven-tion especially if China throws a diplomatic

bone to Washington and allows the renminbi tokeep gaining in coming weeks.


10/16

10


By ian caMpBellLONDON, Oct 5

The Bank of Japan is getting the message. The u.S. ederalReserve and the Bank of England have engaged heavily inqantitative easing to avert deation. Now the BOJ, kicked byJapans politicians, is talking abot QE and achieving pricestability. Japan is trying harder to end its long stagnation, bycopying its western conterparts.

lthogh the new monetary activism srprised markets, it canbe traced to the political rctions of a few weeks ago, whenNaoto Kan, the prime minister, srvived a leadership challengefrom Ichiro Ozawa. Ozawa and his spporters had shotedlodly that Kan and the BOJ oght to be doing more to weakenthe yen, conter deation and invigorate the economy. Theday after Kans victory, the nance ministry intervened in thecrrency markets for the rst time in six years. The BOJ playedball. It did not sterilise the nance ministrys yen sales by is-sing bills. The qestion was what it wold do in October. Nowwe have the answer.

The BOJ adopted a virtally zero interest rate policy, cttingits overnight interest rate to almost zero from the 0.1 percentrate that had prevailed since 2008. It also committed itself tokeeping its interest rate at this minimal level ntil price stabil-ity is in sight. The bank therefore gave itself an imprecise btnonetheless signicant ination target: price stability, not thedeation Japan is sffering now.

The bank also took a step towards qantitative easing, prom-ising to examine establishing a fnd to by longer-termnancial assets, sch as government and corporate bonds.The bank said that fnd might be of 5 trillion yen, abot $60

billion. That is still small beer. The Bank of England has so farspent 200 billion ponds ($320 billion) in a uK economy lessthan half Japans size.

Whats more, the u.S. ed may engage soon in another bigbot of QE. That is ndermining the dollar and means theBOJs moves wont do mch to weaken the too strong yen. Btsmall, almost symbolic steps are better than none. Japan istrying harder to break the grip of deation on its economy and doing it with monetary policy, not still more scal spend-ing.

The world shold welcome that.

The athor is a Reters Breakingviews colmnist. The opinionsexpressed are his own.

(Editing by Hgo Dixon and David Evans)

BREAKINGVIEWS

Bank oF Japan starts to Get itFACTBOX

BOJ uND TO BuY JGBS, CORPORTE DEBT

TOKYO, Oct 5

The Bank of Japan on Tesday decided to set p, as atemporary measre, a 5 trillion yen ($59.9 billion) poolof fnds to by assets ranging from government bonds

to corporate bonds.

ollowing are key points abot the new measre:

The programme will consist of a fnd totalling 5trillion yen to by assets anew as well as the existing30-trillion-yen xed-rate fnd-spply tool that willhold designated assets as collateral.

The programme is a temporary measre aimed atencoraging declines in long-term interest rates andrisk premims.

The fnd is designed to cover Japanese governmentbonds, treasry bills, commercial paper (CP), asset-backed commercial paper (BCP), corporate bonds,exchange-traded fnds (ETs) and Japanese realestate investment trsts (J-REITs).

The BOJ will not apply its self-imposed ceiling on itsotright JGB bying to the JGBs to be prchased withthe new fnd.

The BOJ will aim to bring the balance of assetsprchased sing the new fnd to 5 trillion yen in one

year, with abot 3.5 trillion yen assigned for JGBs andtreasry bills and abot one trillion yen for CP, BCPand corporate bonds.

The BOJ will by JGBs and corporate bonds with aremaining matrity of abot one to two years.

BCKGROuND

The BOJ crrently bys 21.6 trillion yen of JGBs ot-right per year.

under the self-imposed rle, the BOJ limits the ot-standing amont of its JGB holdings to less than thatof bank notes in circlation.

(Reporting by Rie Ishigro; Editing by Chris Gallagher)


11/16

11


IMF MANAGING DIRECTOR DOMINIQUE STRAUSS-KAHN:

interview with Financial Times Oct 5:

There is clearly the idea beginning to circlate that crrencies can be sedas a policy weapon.

Translated into action, sch an idea wold represent a very serios risk tothe global recovery... ny sch approach wold have a negative and verydamaging longer-rn impact.

NOBEL ECONOMICS LAUREATE JOSEPH STIGLITZ: Oct 5 to reporters:

The irony is that the ed is creating all this liqidity with the hope that it willrevive the merican economy.

Its doing nothing for the merican economy, bt its casing chaos over therest of the world. It s a very strange policy that they are prsing.

CHAIRMAN OF EURO ZONE FINANCE MINISTERS JEAN-CLAUDEJUNCKER; news conference Oct 5:

Chinas real effective exchange rate remains ndervaled.

The Chinese athorities do not share or view.

INDIAN CENTRAL BANK DEPUTY GOVERNOR SUBIR GOKARN:

Oct 5 to a private equity conference:

It is becoming a larger global problem becase of the imbalance, thatthere is so mch of liqidity and the retrns are skewed towardsemerging markets.

So it is emerging as a potential threat and we are clearly thinking of ways inwhich we can deal with it.

WORLD BANK PRESIDENT ROBERT ZOELLICK, Oct 4:

I dont foresee that were moving into an era of global crrency wars btthere are clearly going to be tensions.

Money is chasing yield. It cant nd those yields in developed economies andthis is not only pshing p crrency vales in developing contries... (bt)also pshing p prices in assets with the risk of bbbles in property and somecommodities.

QUOTEBOX

comments By policymakers


12/16

ISRAEL CENTRAL BANK GOVERNOR STANLEY FISCHER: Oct 3 to Reuters,

following a news conference:

There is no dobt that withot intervention the shekel wold bemch stronger.

Bt we are not China we are not going to by $500 billion next year.

TAIWAN CENTRAL BANK GOVERNOR PERNG FAI-NAN:

Sept 30 in press conference:

The u.S. printed a lot of money, so theres a lot of hot money owingarond. We see hot money in Taiwan and elsewhere in sia. These short-termcapital ows are distrbinig emerging economies.

BRAZIL CENTRAL BANK GOVERNOR HENRIQUE MEIRELLES;

to news conference Sept 29.

Evidently, there is a very serios crrency problem which shold be ad-dressed. Its not necessarily a war. Some contries seem to have a problem...Brazil is not going to pay the price.

BRAZIL FINANCE MINISTER GUIDO MANTEGA: speech on Sept 27

Were in the midst of an international crrency war. This threatens s be-case it takes away or competitiveness.

CHINA VICE COMMERCE MINISTER CHEN JIAN; to media in Taiwan Sept.

27 on proposed U.S. bill to force China to allow the yuan to rise in value:

Well make a decision based on or own economic development levels andthe world economic sitation. If it takes the yan to appreciate for or econo-my to develop, we will do it even thogh it wold have negative impact.

Bt it is redndant for the u.S. congress to pass the proposal.

JAPAN FINANCE MINISTER YOSHIHIKO NODA: Sept 17 to news conference

regarding Japans intervention to weaken the yen:

Im aware that there are varios opinions. Bt Japans stance is that a pro-longed yen rise is ndesirable as the economy remains in a severe sitationwith ongoing deation. It is important to consistently explain or stance tothe international commnity.

JUNCKER: Sept 15 to media when asked about Japans intervention:

unilateral actions are not the appropriate way to deal withglobal imbalances.



13/16

13


More governments arond the world are movingto keep their crrencies from appreciating asinvestors, trning their backs on low interestrates in developed economies, por money intohigher-yielding markets.

The following are recent cases of direct orindirect government intervention in the crrencymarkets, compiled by Reters:

JPN CuTS RTES, INTERENESOR IRST TIME SINCE 2004

Bank of Japan nexpectedly pledges to pmpmore fnds into the economy on Oct 5, lanchescomprehensive monetary easing, keeps ratesvirtally at zero.

thorities intervene on crrency market onSept. 15, rst time since 2004, to drive downyen, selling estimates 2 trillion yen. igres latershow Sept. sales total 2.1249 trillion yen($25.37 billion)

Prime minister signals Tokyo ready tokeep intervening

Yen fell 3 pct on rst day of governmentyen selling

BRZIL TKES MOREGGRESSIE CTION

Brazil warns of crrency war, dobles tax onforeigners bying local bonds

Brazil sovereign fnd yet to intervene in forex

Brazil athorises sovereign wealth fnd toby dollars

Central bank steps p daily dollar actions

Government dismisses chatter ofcapital controls

SWITZERLND HOLDS OON INTERENTION

Cenbank spent nearly 200 bln Sfr via interven-tions from March 2009

Interventions stopped in Jne of this year

Traders speclate Japan move cold promptSNB to resme intervention

Swiss franc irting with parity against dollar

CHILE WRNS ON PESO, NOINTERENTION YET

Chile central bank ps rate 50 bps, eyeson peso

Peso trading arond same level that triggeredintervention in 2008

Central bank isses threats bt relctant to act

SOuTH KORE SPOTTEDBuYING DOLLRS

thorities repeatedly spotted bying dollarsto crb the pace of appreciation in the won. Woncrrently at highest level since May.

X reserves rose more than $4 billion inSeptember to a record level of $290 billion.

FACTBOX

steps countries are takinGto counter hot money


14/16

ccmlation of reserves to last at leastfor months

PERu ESES GRIP ON

uND OuTLOWS

Cenbank orders new rise in minimmdeposit reqirements

Pension fnds allowed to hold moreassets abroad

Crrency trading near two-year highagainst dollar

Pers sol to be boosted by 6-7 pct growth

in 2011

ROMNI INTERENTION CITEDS LEu IRMS

Cenbank has intervened reglarly sincelate 2008

THILND TRYING TO SLOWBHT GINS

Cenbank worried abot bahts 13-year high,stdying ways to control inows

nnonces well agged measres on Sept 23to encorage otows

Baht one of sias best-performing crrenciesthis year

PHILIPPINES NOT COuNTERINGPESO MOEMENT GINST DOLR

Cenbank says taking no action to alter move-ment of peso, at highest in more than two years

Says liqidity ows are manageable, no impo-sition of capital controls being considered

INDONESI CENTRL BNKWIDENS RNGE O MTuRITIES

Cenbank says nworried abot capital inows,will try to manage rpiah crrency

Cenbank introdced a minimm holding pe-

riod for its bills in Jne by offering a wider rangeof matrities

Investors mst hold the bills for minimm ofone month

COLOMBI CENTRL BNKBuYS DOLLRS

inance minister says government to offerincentives for companies to keep dollars abroad

Colombia central bank keeps rate stable,eyes peso

Central bank starts bying at least $20million daily

nalysts say move insfcient, othermeasres expected

14



15/16

15


By neil chatterjeeanD aDitya suharMokoJKRT, Oct 5

ITS taken a year, bt Indonesias central bankhas nally won over markets into acceptingits dovish policy otlook. Still, it doesnt feel

like a sccess.

Instead, the policy that is designed to redcethe allre of Indonesian assets to yield-hngryinvestors is attracting capital into the contrysdebt markets and increasing the risk that a-thorities will take steps to control the tide.

oreign bying of government bonds has revived

in the past month as markets accepted the cen-tral bank will keep to its promise of holding itspolicy rate at a record low well into 2011, a viewnderlined by a policy meeting on Tesday.

oreigners now own a record 28.2 percent of themarket, well above the levels seen in other siancontries.

Like other emerging markets, Indonesia is con-cerned that a ood of capital into the contrynow cold jst as easily ood ot later sch

as when developed markets stabilise and lookpoised to start a monetary tightening cycle and so knock the economy for six.

The sian nancial crisis in 1997/98, whencapital ight broght several sian economies

CASE STUDY

indonesia inFlows surGeraisinG risk oF controls

Slowing ination takes pressure off

central bank to hike this year

Bank Indonesia credibility gets

boost, so do bond bulls

Worries on inows spur central

bank to look at policy alternative

Expectations rise Jakarta to take

steps to control inows

inclding Indonesias to its knees, remains a rawmemory.

Jdging by the recent pace of inows over thepast weeks I woldnt be srprised if at somepoint we see more administrative measres,said Helmi rman, bond strategist at BankDanamon in Jakarta.

In Jne, the central bank imposed a 28-dayholding period on its poplar bills and pshedinvestors towards longer-dated bills and govern-ment bonds to cope with the foreign money

ooding into the short end of the debt market.

The move calmed volatility bt has done littleto redce the allre of Indonesian debt, whichyields several times more than eqivalent debtin developed markets.

RTE RISE LST RESORT?

oreign bond investment had eased p inanticipation of a central bank rate rise this year.Instead, Bank Indonesia raised bank reserve

reqirements in September, persading marketsthat raising rates wold be a last resort.

The latest Reters poll at the end of Septembershowed expectations for the rst rate rise to bein the rst qarter of 2011.


16/16


Indeed, Tesdays rate meeting and data onriday showing September ination slowedmore than forecast as the central bank hadpredicted earlier this year may psh expecta-tions back frther.

This will strengthen BIs resolve to keep the BI

rate at 6.5 for mch longer, said Danamonsrman, who doesnt expect the central bank toraise rates ntil the second qarter of 2011.

With ination potentially nder control for now,and renewed worries over a doble-dip recessionleading central banks in the united States, Ja-pan and the united Kingdom to weigh measresto loosen monetary policy frther, BI is sddenly

looking prescient.

Controlling its historic problem of ination which hit 12 percent in 2008 and led to a 26percent slide in the rpiah will improve itscredibility and odds of a ratings pgrade.

oreign demand has lopped 260 basis pointsoff the 10-year government bond yield this year.

It now yields 7.46 percent, a record low bt 5percentage points over u.S. 10-year bond yieldsand well above corresponding debt in Thailandand Mexico.

The central bank is convinced it has chosen thelesser of the evils by keeping rates at a recordlow. If it raised rates, capital inows wold be

even greater, it arges.

If the BI rate increases, there will be additionalcapital inows, said Depty Governor Hartadi. Sarwono at a brieng.

The inows have pshed the rpiah p 5.4 per-cent this year. Last week, inance Minister gsMartowardojo expressed his concern, saying he

did not want to see the crrency overvaled.

We have other initiatives to tackle hot money,he told Reters.

Indonesias views are echoed elsewhere. siancentral banks spent an estimated $16 billion lastweek on crrency intervention to crb strengthin their crrencies against a weak u.S. dollar

and policymakers have warned of measres tocontrol the inows.

Brazil dobled a tax on foreign bond prchases.

CONTROL THE TIDE

nalysts say Indonesia is nlikely to imposeotright capital controls for fear of scaring off

investors and hrting its chances of secring aninvestment grade credit rating which the nanceminister says cold happen as soon as next year.

It also knows that investors can be qick to trnagainst a contry that imposes capital controls.Draconian controls imposed by Thailand in 2006sparked the biggest one-day plnge in its stockmarket, forcing athorities to backtrack.

They know the long-term damage that can do,said Wellian Wiranto, an economist at HSBC in

Singapore.

So any measres are likely to be ones that en-corage investors frther along the yield crve,similar to those pt in place by the central bankin Jne, analysts say.

These cold inclde the introdction of12-month central bank debt to draw fnds awayfrom its shorter-term bills and steps to drainliqidity by pshing banks to lend more.

Bt the central bank risks sdden otows in2011 if it falls behind the crve in any bot ofglobal risk aversion or when developed nationsnally start normalising policy rates.

lnerability to the volatility of internationalcapital ows remains signicant, said EnriqeBlanco rmas, a senior World Bank economist.The capital inows are making policymakingand monetary policy more difclt.

(Editing by Neil llick)

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Cover photo: portrait of Benjaminranklin on a u.S.One-hndred dollar bill ispictred at Interbank Inc.money exchange in Tokyo,in this September 9, 2010pictre illstration.REuTERS/Yriko Nakao

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Global Currency War - REUTERS - 2010-10-06

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