Bretton Woods II in a new guise

Talk on currency issues has not yet reached the limit. The title of the front page article in today's FT is more sensational: "Fears of currency war rise." Another article indicates that

Between September 27 and October 11, central banks in South Korea, Malaysia, Indonesia, Thailand and Taiwan collectively purchased $28.74bn, according to estimates by IFR Markets.

Simon Derrick at Bank of New York Mellon estimates that the scale of intervention from these central banks means they have accumulated foreign exchange reserves at between two and six times normal rates in recent weeks.

This article put an emphasis on Asian central bank's failure to stem the rise of their currencies, revealing that their currencies have climbed since intervention. Their failure to depreciate the currency is the direct result of the Fed's ultra loose monetary policy. What is worse for them is that the Fed is unlikely to reverse the current policy anytime soon. The minutes from September's FOMC released yesterday showed that

Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC's dual mandate, it would be appropriate to provide additional monetary policy accommodation.

Lackluster employment condition in September would warrant the Fed's additional accommodation. So, it's highly likely that the Fed decides some additional accommodation, probably the purchase of Treasury, at the next FOMC meeting in early November.

Given that the Fed's additional accommodation is coming, what would happen?

According to BIS, emerging economies have borne the brunt of market forces which are driving their currencies higher. In real terms, the currency of Indonesia, Malaysia, India, and Thailand all appreciated more than 5% this year, while China's yuan gained mere 3% despite of its gigantic economic prowess. It's no less surprising that dissatisfaction has been mounting among emerging economies which also have to underpin the economy with export. The euro lost nearly 11% of its value mainly due to Greek or other European countries' economic crisis. It has recently regained its momentum though, reaching at the near $1.4. European authorities, especially Germany, would not be glad at that

Asian countries are not set to accept the rising currency, so I think that they continue buying dollars to depreciate their currencies. Familiar with that? Yes. Hefty purchase of dollars would sink the US interest rates, and hence the dollar would keep weakening due to compressed interest rates differentials among major economies along with the Fed's ongoing loose monetary policy.

Money cycles between Asia and the US. Here is Bretton Woods II in a new guise.