FOREX FIGHT CLUB

NOTICED that lots of your friends and workmates have been heading overseas for holidays lately? Been bargain shopping on the net more frequently for clothes and other goodies?

That makes you, and them, frontline foot soldiers in the "Currency Wars", a struggle between the economic heavyweights of global politics to retain and increase their respective grips on world trade.

As broker Mike Hawkins from Evans & Partners put it this week: "Take your Australian dollar go forth and plunder. You are extremely wealthy exploit it while it lasts."

The falling value of the US currency is rippling across the planet. As the US tries to jump-start its economy by keeping interest rates at, or near, zero to make it easier for people and businesses to borrow money, that also lowers the attraction and value of the US dollar to overseas investors.

Good for Australian consumers in the short term, but not so good long term because the bulk of our export deals are paid for in US dollars, and they are now worth a lot fewer Australian dollars.

US President Barack Obama's financial advisers are also flirting with "quantitative easing": printing more money (actually, these days it is a computer entry) which is then used to buy long-term bonds and other "safe" investments to send twin messages to financial markets that the interest rates those investments carry is as good as it is going to get, and that the interest income will not be eroded by inflation any time soon.

They are also "jawboning" world markets about the need for China to let its yuan run free, rather than in step with the US dollar, arguing that its worth is artificially low and giving Chinese exporters an unfair advantage over competitors.

Money and words may well be the only weapons deployed, but the collateral damage to the trading allies of the US and China and to people around the world is real. Chinese Premier Wen Jiabao has bluntly told the US and Europe twice in the past month of the risks to China's 1.3 billion people, and Beijing's grip on power, if it adopts a radical currency revaluation.

"We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs, and how many migrant workers will return to the countryside," he said in New York, "China would suffer major social upheaval."

Wen also has a vested interest in not seeing the US dollar fall too far China is the largest holder of US Treasury securities close to $US850 billion. The worth, and the interest income, of those investments dips as the gap widens between the yuan and US dollar. And the yuan has already gained more than 5 per cent since China's last mini-liberalisation of its currency in mid-June.

The US anguish over its trading relationship with China was heightened yesterday by its latest trade figures, which showed that imports from China hit a record $US35.3 billion in August, and the running total for 2010 is almost 24 per cent higher than last year. The great wall of China exports produced a $US16.9 billion trade surplus for Beijing in September, and a $US65.6 billion trade gap with the US for the September quarter.

"This issue, which people like to frame as uniquely an American preoccupation, is really much more important to the rest of the world and is really a global problem as a whole," said US Treasury Secretary Timothy Geithner in an interview this week.

"What's happening is, as China holds its currency down, (emerging economies') currencies are moving up and they're having to work very hard to make sure they're not at an unfair disadvantage with China."

He pooh-poohed the idea of a global currency war, diplomatically arguing that "this is going to be a gradual process and what matters to us is that (China) continue to let their currency rise to reflect those market forces . . . China takes a long view of these things".

America's stance is not that altruistic, though, because part of the way in which countries try to reduce the value of their currency is through buying US dollars which drives the greenback's value up again.

Even allowing for the fact that some of that represents build-up of stocks by US retailers for Christmas selling, it is a worrying sign that so long as cheap Chinese goods are available, US consumers will spend money buying them rather than save to rebuild household wealth and pay back debt.

Forget what you have heard about economic recovery over the past 18 months. The US was, and still is, seriously wounded unemployment has rocketed, production is down, and the mountains of debt it took on to defend against wholesale collapse of its financial system rivals the Himalayas.

A New York Times report this week, that asked "how come the recovery looks like a recession?" had some frightening facts: at the current rate of job creation, the US would need nine more years to replace the jobs lost during the recession, with another 5 million jobs needed for the expanding population. And the 20 per cent drop in house prices since 2005 would take 13 years to recoup given the current 2 per cent inflation rate.

In some cases, the US policy effects are magnified. Speculators borrow money in the US at near-zero interest rates, and then invest it in the markets of countries offering higher rates to make a profit an activity known as the "carry trade". To do that, they have to buy the local currency, creating both a demand which drives that country's exchange rate higher, and a subsequent policy headache for local politicians.

Small wonder that there is a rise in emotive statements that sound like sabre-rattling as politicians front up to financially damaged voters in current and impending elections. And it is not only embattled US politicians doing it.

Two weeks ago Brazil, its currency rising thanks to the carry trade, doubled to 4 per cent a tax on foreign capital inflows into its bonds. The move came the day after the ruling party's presidential candidate was forced into a run-off vote against an opposition promising more aggressive fiscal policy.

The new tax rules had to be tightened after the speculating smarties tried to avoid the tax by first buying shares in Brazil, which have a lower tax rate, and then switching to bonds. Still, it is possible that the US attempts to raise protective barriers to speed up its economic recovery may later be seen as merely a delaying action in a war already lost the replacement of the US dollar as the world's reserve currency by either the euro or China's yuan.

More than two-thirds of the currency reserves in the coffers of non-US central banks are still in US dollars, and most international deals and contracts are still transacted in US dollars even when neither buyer nor seller is American.

The US attempt to keep down the value of its dollar is the key reason behind the strength of the Australian currency on world markets, no matter what domestic political parties would like to claim, and there is little that could be done to change it even if Treasurer Wayne Swan and his colleagues wanted.

Japan's central bank, for example, spent billions selling the yen and buying US dollars last month to try to slow down the rise in its currency. It spent $US24 billion for an effect that lasted 72 hours, and there are reports it is considering another try.

Foreign exchange reserves held by the Reserve Bank of Australia on September 31 were only $US32 billion in total or just over a day's worth of intervention if the RBA wanted to match the Japanese.

Fortunately, our policy has long been only to "smooth" sharp downward moves in the currency by selling enough dollars to slow down a slide long enough for some of the hysteria to evaporate.

It may be cheaper for us to travel or buy things, but the other side of that particular coin is that our exports cost more to foreign buyers, crimping demand for Australian products.

"I don't think things are going to change soon," says Melbourne Business School associate professor Mark Crosby.

"It's been going on since 2003 . . . when China started accumulating foreign reserves."

He argues that the US reasoning for wanting China's currency to appreciate is flimsy, because the developing nation's underpriced exports are not really competing with anything the US produces.

"As the US heads up to elections, and the economy continues to be weak, you will hear a lot more about trade sanctions," adds Crosby, recalling that it was not that long ago the firm US line was that a strong US dollar was good for all.

Crosby has more than an academic interest in the subject. An MBA from Melbourne Business school costs about $60,000 at its most basic.

A year ago, that was equivalent to 360,000 yuan, but is now close to 400,000 an increase of more than 10 per cent and a problem being faced by Australia's education sector, which is the nation's largest services export.