Will us dollar appreciate

Answer 1

From: Chinastakes.com

September 18,2009 Mundell: Dollar Will Rebound and China Bought $24.1 Billion Treasury Bills

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By CSC staff, Shanghai

Gold price rises will facilitate economic recovery in the US and end this round of USD depreciation, while China shows confidence in the US economy and the dollar.

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In July, China increased its holding of US treasury bonds by $24.1 billion to more than $800 billion to continue as the US's largest creditor. Robert Mundell, Nobel laureate in economics, "Father of the Euro," says this shows China's confidence in the US economy and dollar. "This also confirms what I said earlier, that the US economy is coming out of recession and the dollar devaluation will end. I think it is a good opportunity now to buy US government bonds. The US economic recovery has begun, and the dollar will appreciate, and buying US assets now will be rewarding."

At a speech delivered at the second session of the Asia-Pacific Forum held in Guangzhou on September 17th, Mundell said the dollar devaluation will end in the short term. 70% of US currency is in circulation outside the US. With US economic recovery, the market demand for the dollar will increase, which will lead to the dollar strengthening, and the world will rush to buy dollars, leading to its appreciation. Mundell believes the current exchange rate of USD to the euro of 1.46:1 may reach 1:1 in the future.

Investors have been thinking that falling USD will inevitably affect commodity prices, especially gold. Mundell says however, that gold prices will help the US economy recover and end the dollar depreciation. "Last June, when the price of gold was about $980/ounce, the dollar appreciated greatly and gold prices fell. The reason for dollar devaluation is huge selling of US dollars by investors because Federal Reserve Chairman Ben Bernanke tightened the monetary supply and Lehman went bankrupt. Under the current circumstances, although commodity prices have risen, the inflation index of the US is decreasing. So I think the Fed will adhere to its moderately loose monetary policy rather than tighten the monetary supply, which will contribute to US economic recovery."

Mundell argues that the dominant status of the dollar will continue. "We need to think whether there are other monetary systems available." The euro cannot replace USD in the short term. The dollar is the debt of the US government, and holding one means having a claim against the US. The euro is the debt of 15 countries, and may well be abandoned if a big international event, such as a war, were to occur. Japan's economic problems rule out the yen. The remaining choice is China's renminbi (RMB). US GDP is $14 trillion, while China's is $4 trillion. China will not catch up with the US until perhaps 2030 or 2040. And RMB is not freely convertible, and its transition will be long and uncertain. The current international dominance of the US dollar will not be overturned any time soon.

Mundell's thinking is in line with that of Ben Bernanke, that USD depreciation will soon end and now is a good time to invest in US bonds.

Mundell believes the current US economy has moved into a growth stage after a contraction. But the economic recovery depends on employment. The current unemployment rate in the US is around 10%, and the economy will really only have recovered when the unemployment rate drops back to about 5%. He says, "I prefer to define economic situations with the concept of 'contraction and expansion.' The current situation shows the US economy has ended contraction and is entering expansion. I think Bernanke's judgment is right, and I also agree with his point of view. The current credit tightening is still a big issue, and I hope the Fed will not tighten it too soon."