Dollar clings to most of its gains as risk sentiment improves

TOKYO — The dollar held on to most of its gains on Tuesday, following a sharp rebound on improving investor risk sentiment as worries over North Korea and Hurricane Irma receded.

The dollar index, which tracks the greenback against a basket of six major rivals, was steady at 91.874, after it skidded to a 2-1/2-year low of 91.011 on Friday.

The euro was little changed at $1.1955 after shedding 0.7 percent overnight. The common currency reached $1.2092 on Friday, its highest since January 2015, as the dollar suffered a broad retreat.

Higher US Treasury yields also bolstered the dollar, as the benchmark US 10-year note yield rose to 2.135 percent from its close of 2.125 percent on Monday, and 2.061 percent on Friday.

"Some people said the dollar's fall and recovery was not strange, since US yields got so low," said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

"But the market is still sensitive to risk-off news, maybe from North Korea, or from disappointing US economic data," he said. "So that's why the dollar is still struggling to find its way."

The dollar was steady at ¥109.39 after rallying 1.4 percent on Monday, its biggest one-day surge since mid-January.

It had slumped to a 10-month low of ¥107.320 on Friday, when Hurricane Irma threatened Florida and as financial markets braced for the possibility of another missile or nuclear test to mark North Korea's founding day on Sept. 9. The yen tends to benefit during times of economic and political uncertainty due to Japan's net creditor nation status.

But Pyongyang's anniversary passed without further tests, and Irma lost strength and was downgraded to a tropical storm after battering Florida over the weekend.

"Receding fear over Hurricane Irma and North Korea was a key factor behind the dollar's bounce. Market focus is likely to return to fundamentals, although there aren't many major events scheduled this week that could decide the direction for currencies," said Shin Kadota, senior strategist at Barclays in Tokyo.

Major US allies in Asia welcomed on Tuesday the UN Security Council's unanimous vote to step up sanctions on North Korea, with its profitable textile exports now banned and fuel supplies to the reclusive North capped after its sixth nuclear test.

The Swiss franc, often sought in times of global risk aversion along with the yen, was flat at 0.9560 per dollar. The franc had rallied to a two-year high of 0.9421 on Friday.

The pound edged up 0.1 percent to $1.3175 after losing 0.25 percent on Monday.

Sterling fared better against the euro, brushing a fresh one-month high of 90.83 pence, aided by speculation that the Bank of England may sound more hawkish on interest rates in defense of the currency at its policy meeting on Thursday.

The Australian dollar was 0.2 percent lower at $0.8015, extending its retreat from a two-year peak of $0.8125 scaled on Friday.

The Chinese yuan pulled further away from Friday's 21-month high against the dollar of 6.5432, after China's central bank on Monday lifted measures put in place to support the yuan when it came under selling pressure. — Reuters

What it means if Trump names China a currency manipulator

WASHINGTON  — President-elect Donald Trump has vowed to name China a currency manipulator on his first day in the White House.

There’s only one problem—it’s not true anymore. China, the world’s second-biggest economy behind the United States, hasn’t been pushing down its currency to benefit Chinese exporters in years. And even if it were, the law targeting manipulators requires the U.S. spend a year negotiating a solution before it can retaliate.

Trump spent much of the campaign blaming China’s for America’s economic woes. And it’s true that the U.S-China trade relationship is lopsided. China sells a lot more to the United States than it buys. The resulting trade deficit in goods amounted to a staggering $289 billion through the first 10 months of 2016.

But in fact, for the past couple of years China has been intervening in markets to prop up its currency, the yuan, not push it lower.

What does currency have to do with the trade gap?

When China’s yuan falls against the U.S. dollar, Chinese products become cheaper in the U.S. market and American products become more costly in China.

So the U.S. Treasury Department monitors China for signs it is manipulating the yuan lower. Treasury has guidelines for putting countries on its currency blacklist. They must, for example, have spent the equivalent of 2 percent of their economic output over a year buying foreign currencies in an attempt to drive those currencies up and their own currencies down.

Treasury hasn’t declared China a currency manipulator since 1994.

What would happen if the US declared China a currency manipulator?

Probably not much, at least initially.

If Treasury designates China a currency manipulator under a 2015 law, it is supposed to spend a year trying to resolve the problem through negotiations.

Should those talks fail, the U.S. can take a number of small steps in retaliation, including stopping the U.S. Overseas Private Investment Corp., a government development agency, from financing any programs in China. Trouble is, the United States already suspended OPIC operations in China years ago — to punish Beijing in the aftermath of the bloody 1989 crackdown in Tiananmen Square.

So naming China a currency manipulator is mostly “just a jaw-boning exercise,” said Amanda DeBusk, chair of the international trade department at the law firm of Hughes Hubbard & Reed and a former Commerce Department official. “There’s no immediate consequence.”



Is China guilty of using currency to help its exporters?

For years, China pretty clearly manipulated its currency to gain an advantage over global competitors. It bought foreign currencies, the U.S. dollar in particular, to push them higher against the yuan. As it did, it accumulated vast foreign currency reserves — nearly $4 trillion worth by mid-2014.

But now the Chinese economy is slowing, and Chinese companies and individuals have begun to invest more heavily outside the country. As their money leaves China, it puts downward pressure on the yuan.

The yuan has dropped nearly 7 percent against the dollar so far this year. The Chinese government has responded by draining its foreign exchange reserves to buy yuan, hoping to slow the currency’s fall. China’s reserves have dropped by $279 billion this year to $3.05 trillion.

If Beijing stepped back and let market forces determine the yuan’s level, it likely would fall even faster, giving Chinese exporters even more of a competitive edge.

So Beijing is doing the opposite of what Trump says it’s doing. Cornell University economist Eswar Prasad earlier this month called Trump’s plans to name China a currency manipulator “unmoored from reality.”

“The whole discussion is ironic,” said David Dollar, senior fellow at the Brookings Institution and a former official at the World Bank and U.S. Treasury Department. “It’s out of date.”

Could Trump do anything on his own?

Gary Hufbauer, an expert on trade law at the Peterson Institute for International Economics, notes that as president, Trump could nonetheless escalate any dispute over the currency on his own. Over the years, Congress has ceded the president broad authority to impose trade sanctions. Trump has threatened to slap a 45 percent tax, or tariff, on Chinese imports to punish it for unfair trade practices, including alleged currency manipulation.

Brookings’ Dollar said China likely would bring a case to the World Trade Organization “against any protectionist measures that are a violation of U.S. commitments to the WTO,” which oversees the rules of global commerce and rules on trade disputes.

Some trade analysts wonder if Trump is using the tariff threat as a negotiating tool to win concessions from China.

Whatever the U.S. motive, China has a consistent record of retaliating against trade sanctions. When the Obama administration slapped tariffs on Chinese tire imports in 2009, for instance, China lashed back by imposing a tax on U.S. chicken parts.

China’s Global Times newspaper, published by the ruling Communist Party’s People’s Daily, has already speculated that “China will take a tit-for-tat approach” if Trump’s tariffs are enacted. The paper suggested that Beijing might limit sales of Apple iPhones and Boeing jetliners in China.

“The Chinese are predictable and reliable,” DeBusk said. “If they get punched, they punch back.” TVJ

source: business.inquirer.net

US economy: Consumer spending bolsters second-quarter growth

WASHINGTON -  U.S. economic growth accelerated in the second quarter as solid consumer spending offset the drag from weak business spending on equipment, suggesting a steady momentum that could bring the Federal Reserve closer to hiking interest rates this year.

Gross domestic product expanded at a 2.3 percent annual rate, the Commerce Department said on Thursday. First-quarter GDP, previously reported to have shrunk at a 0.2 percent pace, was revised up to show it rising at a 0.6 percent rate.

The revision to first-quarter growth reflected steps taken by the government to refine the seasonal adjustment for some components of GDP, which economists said left residual seasonality in the data, as well as new source data.

The Fed on Wednesday described the economy as expanding "moderately" while upgrading its view of the labor market and saying housing had shown "additional" improvement. The Fed's assessment left the door open for a possible hike in interest rates in September, which would be the first rise since 2006.

A separate report showed first-time applications for state unemployment benefits increased 12,000 last week to a seasonally adjusted 267,000. However, claims remained not too far from their cycle lows.

The dollar extended gains against a basket of currencies, while prices for U.S. Treasury debt fell slightly.

Though second-quarter GDP growth was a bit below economists' expectations for a 2.6 percent rate, the growth composition pointed to firming domestic fundamentals.

A measure of private domestic demand, which excludes trade, inventories and government expenditures, increased at a 2.5 percent rate after rising at a 2.0 percent pace at the start of the year.

Growth in the second quarter was boosted by consumer spending as households used some of the windfall from cheaper gasoline in late 2014 and early this year to go shopping. The strengthening labor market also encouraged consumers to loosen their purse strings.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.9 percent rate from a downwardly revised 1.8 percent pace in the first quarter. Consumer spending was previously reported to have increased at a 2.1 percent rate at the start of the year.

The saving rate fell to 4.8 percent from 5.2 percent.

ENERGY DRAG PERSISTS

Housing also supported the economy in the second quarter, as did exports, and state and local government spending.

However, the energy sector continued to weigh on growth as it struggles with the lingering effects of deep spending cuts by oil-field companies like Schlumberger (SLB.N) and Halliburton (HAL.N) in the aftermath of a more than 60 percent plunge in crude oil prices last year.

Business spending on structures fell at a 1.6 percent rate after stumbling 7.4 percent at the start of the year. Investment on equipment fell at a 4.1 percent rate.

Spending on mining exploration, wells and shafts plunged at a 68.2 percent rate, the largest decline since the second quarter of 1986. This category dropped at a 44.5 percent pace in the first quarter.

But there are signs that the energy spending rout might be nearing an end. Data last Friday showed U.S. energy firms added 21 oil rigs last week, marking the third increase over the past 33 weeks.

Schlumberger said last week it believed the North American rig count may be bottoming and that a slow rise in both land drilling and completion activity could occur in the second half of the year.

Exports rebounded in the second quarter, despite a strong dollar, while imports rose moderately. That left a smaller trade deficit that added 0.13 percentage point to GDP growth.

Inventory investment slowed after the first quarter's brisk pace. Businesses accumulated $110.0 billion worth of merchandise, down from $112.8 billion in the first quarter, good news for the remainder of the year.

With oil prices rising during the second quarter and consumer spending picking up, inflation accelerated sharply.

The personal consumption expenditures price index rebounded at a 2.2 percent rate, the fastest since the first quarter of 2012, after falling at a 1.9 percent rate at the start of the year. Excluding food and energy, prices increased at a 1.8 percent pace.  — Reuters

US urges IMF to cancel debt of Ebola-stricken countries

WASHINGTON - The United States on Tuesday proposed that the International Monetary Fund write off some $100 million in debt it is owed by Guinea, Liberia and Sierra Leone to free up more resources for those countries, the hardest hit by the Ebola outbreak.

The debt relief should enable the three impoverished West African countries to spend more on government services and to support their economies as they cope with the devastating epidemic, U.S. Treasury officials told Reuters.

The countries now owe the IMF a combined $372 million, of which $55 million comes due over the next two years, officials said on condition of anonymity.

"The International Monetary Fund has already played a critical role as a first responder, providing economic support to countries hardest hit by Ebola," US Treasury Secretary Jack Lew said in a statement issued to Reuters. "Today we are asking the IMF to expand that support by providing debt relief for Sierra Leone, Liberia, and Guinea."

The US proposal must still be approved by the IMF's other 187 member countries. Lew will recommend the move to the Group of 20 leading economies at their meeting in Brisbane, Australia this week.

The United States proposed that the money for the $100 million in IMF debt relief should come from a special trust fund set up for poor countries coping with catastrophic natural disasters, which now contains about $150 million of the IMF's own resources.

The so-called Post-Catastrophe Debt Relief Trust was first used for Haiti in the aftermath of its 2010 earthquake.

In September, the IMF approved $130 million in aid to the three countries to help them deal with the economic impact from the Ebola virus, which has sapped their growth, cut into tax revenues and affected exports and other industries.

The IMF estimated last month that the three countries faced financing gaps of about $300 million this year and could also face large financing needs in 2015 as their economic situation deteriorates.

Liberia, Sierra Leone and Guinea are among West Africa's poorest countries and the hardest hit by the worst Ebola epidemic since the disease was identified in 1976. The virus has killed at least 4,950 people out of about 13,240 cases this year, according to the World Health Organization.  — Reuters

US Congress enters crucial week in battles over budget, debt limit

WASHINGTON - As the U.S. government moved into the second week of a shutdown on Monday with no end in sight, a deadlocked U.S. Congress also confronted an Oct. 17 deadline to increase the nation's borrowing power or risk default.

The last big confrontation over the debt ceiling, in August, 2011, ended with an eleventh-hour agreement under pressure from shaken markets and warnings of an economic catastrophe if a default were allowed to occur.

A similar last-minute resolution remained a distinct possibility this time as well.

In comments on Sunday political talk shows, neither Republicans nor Democrats offered any sign of impending agreement on either the shutdown or the debt ceiling, and both blamed the other side for the impasse.

"I'm willing to sit down and have a conversation with the president," said Republican House of Representatives Speaker John Boehner, speaking on ABC's "This Week." But, he added, President Barack Obama's "refusal to negotiate is putting our country at risk."

On CNN's State of the Union, Treasury Secretary Jack Lew said: "Congress is playing with fire," adding that Obama would not negotiate until "Congress does its job" by reopening the government and raising the debt ceiling.

Shutdown, debt ceiling issues merged

The two issues started out separately in the House but have been merged by the pressure of time.

Conservative Republicans in the House have resisted funding the government for the current fiscal year until they extract some concession from Obama that would delay or defund his signature healthcare law, which launched Oct. 1.

Many of those conservatives want a similar condition placed on raising the debt ceiling, but in his list of debt-ceiling demands Sunday, Boehner did not mention the Affordable Care Act, commonly known as Obamacare.

"It's time to talk about the spending problem," said Boehner, including measures to rein in costs of entitlement programs such as the Social Security retirement system and Medicare, the government-run health insurance plan for seniors.

Harry Reid, leader of the Democratic-led Senate, is expected to decide soon on whether to try to open formal debate on a "clean" bill - without extraneous issues attached - to raise the U.S. Treasury's borrowing authority.

Passage of such a measure would require at least six of the Senate's 46 Republicans to join its 54 Democrats in order to overcome procedural hurdles that opponents of Obamacare could erect.

According to one Senate Democratic aide, the debt limit hike might be coupled with a new initiative to reform the U.S. tax code and achieve long-term savings in Social Security and Medicare, whose expense has soared along with the population of retirees.

Republican lawmakers have floated other ideas, such as a very short debt limit increase, which would create time for more negotiation at the expense of further market uncertainty, and repeal of a medical device tax.

The tax is expected to generate some $30 billion over 10 years to help pay for healthcare insurance subsidies under Obamacare.

Some Democrats favor repealing the tax, but they insist that replacement revenues be found and repeal be considered only after government reopens and the debt limit is raised.

Major problems in House 

Agreement in the Senate would send the snarl of issues back into the House, whose Republican caucus has adopted a hard line on both Obamacare and the debt ceiling.

There may be enough votes in the House for passage of a clean bill, according to some analysts. That would require almost all of the House's 200 Democrats and about 20 of its 232 Republicans to vote in favor. But taking such a vote would require Speaker Boehner to violate his policy against bringing a vote on any legislation that is favored by less than a majority of House Republicans.

In any case, neither side is making any move toward accommodation, and the stakes rise with the passage of time.

For any deal to work, negotiators probably would have to choreograph a multi-pronged approach that allows all sides to declare victory, even if it is one that cues up another battle in mid-November or December.

While the shutdown itself is unlikely to cause major disruption in the markets, a fight over the debt ceiling could. In the last two days of the debt-limit standoff of August 2011, the New York Stock Exchange lost 11.2 percent of its value, and the deadlock led to a downgrade of the U.S. credit rating "AA+" from "AAA" by Standard & Poors.

The outlooks from Moody's and Standard & Poor's, the only agency so far to have lowered its rating on U.S. debt, are both at "stable," but Fitch Ratings has indicated a negative outlook for the U.S. debt rating.

All three agencies have said the U.S. debt profile has improved substantially over the past two years, with gross domestic product growth, while slow, proving to be persistently positive and the budget deficit trending lower.

Fitch said in a note last week that the U.S. rating is at risk in the current showdown over the debt ceiling because failure to raise it sufficiently in advance of the deadline, raises questions about the full faith and credit of the United States to honor its obligations.

Political gridlock remains the greatest risk to the U.S. outlook, Fitch said in its note of Oct. 1, the first day of the partial shutdown of federal government operations.

"This 'faith' is a key underpinning of the U.S. dollar's global reserve currency status and reason why the US 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns," Fitch said.

Investors have so far been relatively sanguine about the approaching debt ceiling deadline, but measures of anxiety, such as the Chicago Board Options Exchange's Volatility Index, have begun trending up since the shutdown began last Tuesday. The VIX rose 18 percent last week and briefly hit its highest level since June. — Reuters

source: gmanetwork.com