BURGENSTOCK, Switzerland — Financial market experts are divided over whether the weak dollar could experience a sharp devaluation, and they doubt that increased pressure by Washington on China to revalue its currency, the yuan, will deliver concrete results.
China’s rapid accumulation of foreign exchange reserves, which is expected to soon reach $1 trillion, coupled with its large trade surplus with the U.S., has intensified calls by U.S. Treasury Secretary Henry Paulson Jr. for China to revalue the yuan and accelerate a move toward a fully convertible currency.
The inflated U.S. trade deficit, fanned by high oil prices, has heightened fears that the dollar might be susceptible to a sharp depreciation that could have wide-ranging implications for the global economy.
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However, Patrick Catania, chairman of Chicago-based Asia West Group, said that, while the risk has been out there since the Reagan era (1981-89), when U.S. debt started to soar, he doubts whether a precipitous decline of the dollar is a likely outcome.
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“I don’t know that I would expect that. We’ve been through all these phases where it’s been called for before and it hasn’t materialized,” Catania, a former executive vice president at the Chicago Board of Trade, said in an interview on the sidelines of an international finance conference sponsored by the Swiss Futures & Options Association.
Asked what gives the dollar this resilience, Catania said: “Maybe we’re crazy here with all that debt, but crazy as a fox. It’s been distributed so well globally that many foreign banks have an interest in making sure the dollar doesn’t decline.”
Urs Schneider, professor of finance at the Swiss Finance Institute, said he was concerned that if there was a sharp decline in the dollar, the world economy would be in trouble.
“If there’s a sharp slide of the dollar, it’s not just a matter of the national banks,” he said. “The sharp slide of the dollar means the U.S. economy becomes very competitive in terms of exports.”
But he added that, if it’s not a sharp decline, then other major economies such as those in Western Europe, as well as in Japan, would be able to adapt.
Catania, a 30-year veteran of global markets, said the U.S. economy is still in a healthy situation.
“I think, for our economy in the U.S., the debt is still being absorbed by global investors,” he said. “In fact, there’s adamant interest for more long debt. The treasury will issue more 30-year paper as we go forward, and I suppose with that vote of confidence, I don’t expect the pressure to build.”
In a straw poll of global financial experts, there was a broad view that China needs to do more to revalue its currency and that a move toward a fully convertible currency would contribute to global stability.
However, they also pointed out that strong-arm tactics by Washington were not the best way to extract a positive response from Beijing.
“I don’t think this is going to drive their decision-making,” said Sharon Brown-Hruska, vice president of NERA economic consulting, based in Washington.
“I think they have to make their decisions based on the underlying economics,” said Brown-Hruska, a former commissioner at the U.S. Commodities Futures Trading Commission, adding that, if China wants to become a modern economy, it “must carefully evaluate the levels [of its currency] and ease it up in a responsible fashion.”
Catania said the concerns of Washington are legitimate, but emphasized that “markets tend to bring themselves into balance over time.”
“If they’re allowed to do that, the Chinese could take steps toward this liberalization that could alleviate a lot of the fears,” he said.
The latest quarterly report by the Bank for International Settlements published this month highlights that China’s foreign exchange reserves at the end of July reached $941 billion.
Catania believes the lack of convertibility of the Chinese currency “keeps all of these reserves building up in China, instead of contributing to the rest of the global economy in terms of China increasing imports for foreign goods.”
He pointed out that, if China wants to be the “good citizen” and a good global trade partner, it has to realize it’s a two-way street.
But, he cautioned, “the more people are trying to force it down their throats, the more resistant they’re going to be to that change.”
Beijing understands the potential consequences, Catania said, and believes Washington should back off and give it nine to 12 months to make some changes.
If by then nothing happens, then the U.S. could “increase global awareness of the issue and put it on the front burner,” he said.
When China decides to move to a fully convertible currency, experts said, the move will have widespread implications on global markets.
“China is one of the best-performing economies in the world and obviously, if it were to become convertible, it will have a major impact on many of the other currencies across the globe,” said Framroze Pochara, chief executive officer at the Dubai Gold & Commodities Exchange.
On the outlook for crude oil prices, commodity experts said prices had eased from the record-high $70-plus a barrel, but noted continued strong demand in emerging markets was not likely to see prices drop to below $50 a barrel.
However, some cautioned oil prices are heavily influenced by geopolitical developments, and did not rule out new price spikes if the U.S.-Iran nuclear showdown took a turn for the worst or political crisis or industrial unrest led to a decline or cutoff in supplies from key oil-exporting countries.