FYI | Mar 25 2008
By Greg Peel
Some shopkeepers in New York have begun accepting euros. This is a response to the surge in Europeans crossing the Atlantic on simple shopping sprees, revelling in the strength of the euro which now makes a purchase at Saks Fifth Avenue just like shopping at Target. Rather than change their money at the local Bureau de Change, Europeans can simply hand over euros in some US shops, presumably at a competitive exchange rate. One shopkeeper suggested he would simply hang on to his euro receipts and one day, when the US dollar bounces, take a trip of his own.
At the same time, many Bureaux de Change in Amsterdam are refusing to exchange US dollars at all. These small non-bank dealers operate by building up pools of exchanged US dollars and then exchanging them at the bank for a lesser rate than the dealers charge the tourists. But the dollar had been falling so fast the dealers were actually losing on the trade, irrespective of the criminal exchange rate spreads some of them charge. American tourists have been stranded penniless outside of bank hours.
A meeting of South East Asian central banks will this week include discussions on the US dollar. While there is incentive for many of Asia’s countries to support the US dollar, and prevent exports becoming uncompetitively priced, there is also a desire to move away from buying any more US Treasuries in the future due to the greenback’s perceived chronic weakness. There is a similar conundrum being wrestled with by central banks across the globe.
These central banks include those of America’s allies among the United Arab Emirates. The emirs have decided to leave their currency pegged to the US dollar for now, but only after a little visit from US embassy officials. The dirham’s currency peg has meant rampant inflation has hit the Emirates.
China has had the same experience. With the renminbi also pegged to the US dollar, Chinese officials have instigated more restrictions in the banking sector in an attempt to push the currency higher and relieve inflationary pressures.
But one central bank has announced last week it will begin a policy of building up foreign currency reserves over the next two years in order to back up its growing economy. This will mean buying US$25m a day every day for a total of US$10bn. Yes- the bank intends to buy US Treasuries, and its press release made no indication that any other currency would be considered among “foreign reserves”. At least the US has one supporter left.
No surprises – that country is Israel.
