Flexible Exchange Rate

US's Geithner: China Move To More Flex FX Good For Global Econ

WASHINGTON (MNI) - U.S. Treasury Secretary Timothy Geithner Monday stressed yet again that any move by China towards a more flexible exchange rate regime poses no threat, and in fact would be beneficial, to the global economy.

Taking questions following prepared remarks at the American Bankers Association International Monetary Conference in Atlanta -- for which an audio feed was provided to reporters around the country -- Geithner also said he is confident the process of tackling the United States' long-term deficit burden will begin by the summer.

On China, Geithner said he does not see "any meaningful risk" in the movement towards a more market-determined exchange rate system with a more convertible currency.

"I see those changes as being fundamentally in the interests of the global economy," Geithner said, adding, they "pose no meaningful risk to the United States."

In fact, such gradual action by China would make for a more healthy system, Geithner said.

The U.S. will also be more open to Chinese investment in the United States, he said, as a basic tenet of the American economic system is to "run a system that is open to foreign investment, that we treat all countries equally in this."

It is very important to the basic health of the U.S. going forward that the country is made as attractive as possible to outside investors, Geithner added.

On the ongoing fiscal debate in the U.S., and the likelihood that a resolution will be reached in a timely manner, Geithner said he thinks there is "a very good chance" of beginning the process of long-term deficit reduction this summer.

There is a broad consensus to reduce the deficit by $4 trillion to $5 trillion over the next 10 to 12 years, Geithner noted, with "a lot of overlap" in the spending and savings proposals.

"So I think we have a chance to do something useful on that front," he said.

While the U.S. fiscal situation is an easier problem to solve "at an acceptable cost to the economy," compared to that faced by EU authorities, Geithner said it is important not to delay action.

"The longer we wait, the more risk there is for us and the more cost there is in the ultimate solution," he warned.

In his prepared remarks, Geithner mostly focused on underscoring the need for a global harmonization of not just bank capital standards, but margin requirements for uncleared derivatives as well.

Easy Forex News » Daily Currency Briefing: The IMF will help after ...

A joint statement on the part of the troika (IMF, EU Commission and ECB) was phrased in the usual diplomatic tone and full of praise for the Greek saving efforts promising the payment of the overdue tranche at the end of the consultations. What else could have happened? The IMF had let the recipients of aid payments get away with so much in recent years. Let us remind you of two examples: The logic behind this approach is clear: since the beginning of the financial market crisis the IMF’s main target is no longer a long term stable economic policy of the aid recipinet. In that case it would have to take strict action if its conditions are not met – based on the pedagogical principle of “tough love” as the conditionality has been reduced to the absolute minimum (contrary to the times of the LatAm aid programmes). Instead the IMF’s most important target seems to be the prevention or containment of financial markets crises and in that context the Fund has to be able to turn a blind eye sometimes. Does that mean that the Greece crisis is off the agenda again for the time being? After all the enlargement of the aid package should now go ahead without any problems. After all the EU had long since made it clear that it did not oppose such a step. But: The sword of Damocles of a “restructuring” is still hanging over Greece if some donor countries within the Eurozone continue to insist on involving the bond investors. Even if the European politicians want to prevent a default of Greece: it remains a tight-rope walk. The rating agency Standard & Poor’s has made it clear once again that “voluntary” restructuring can also lead to a default-rating. That means: there is still a danger that with the “voluntary” involvement of investors the EU unintentionally causes a default of Greece. So it is too early to sound the all clear. As a result we consider the rise of EUR-USD risk reversals (our preferred debt crisis indicator) as a good opportunity to sell the latter cheaply. The bond markets seem to share this scepticism. Risk premiums for Greeks bonds did not fall notably on Friday.

USD: Following the publication of the labour market report on Friday FX markets did not really know what to do with the dollar. The US data in the run-up to the publication had been negative as well. So what was new about the information? And after all: What is the appropriate reaction to bad US news at present? Sell the greenback as the US is about to turn into Japan, with long term low growth rates, fiscal problems and a permanent zero rate policy? Or buy the dollar as a poor US economy means increased uncertainty with the dollar constituting a safe haven? Following some toing an froing FX markets settled for the former. The lesson we learn from this delay is: reactions to US data are not always as clear-cut as they used to be.

Moving to a Flexible Exchange Rate, How, When, and How Fast?

Macroeconomic essentials, understanding economics in the news

Floating exchange rates in developing countries, experience with auction and interbank markets

The Economics of flexible exchange rates, proceedings of a conference at the Institute for Advanced Studies, Vienna, March 29-31, 1978

Monetary policy under flexible exchange rates, an introduction to inflation targeting