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Yen and yuan

Money | Japan works to weaken its surging currency while China stands pat

Issue: "On the rails," Oct. 9, 2010

Taking action against a surging yen that hit a 15-year high against the dollar, Japanese Prime Minister Naoto Kan ordered unilateral intervention in the currency market, driving the yen down by 3 percent. The surprise move, accomplished by selling yen and buying dollars, was aimed at enhancing the price competitiveness of Japanese exports and thus shoring up prospects of economic recovery in Japan.

"Japanese exporters had become increasingly concerned, pained and vocal about [yen] strength at a time when export momentum was waning," Mitul Kotecha, head of foreign-exchange strategy at Credit Agricole, told MarketWatch.

The yen had risen more than 10 percent against the dollar this year, driven by investors seeking a safe haven from economic problems in the United States and elsewhere. Although the dollar is also considered a safe-haven currency, the prospect of slower growth in the United States, along with heightened speculation that the Federal Reserve will again try to kick-start the economy with massive amounts of new money, has been weakening the dollar.

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Meanwhile, at two Capitol Hill hearings, U.S. lawmakers pressed Treasury Secretary Timothy Geithner to take action against China for keeping its currency, the yuan, at artificially low levels against the dollar, despite a promise from Chinese leaders earlier this summer to allow more flexible exchange rates. "We are very concerned about the negative impact of these policies on our economic interests," Geithner testified at both hearings, but he stopped short of articulating a specific policy response. U.S. manufacturers have long argued that China's currency policies give Chinese products an unfair advantage in the world marketplace. Chinese officials deny claims of currency manipulation.

Paying it forward

Insisting the payment was "not a bailout," Pennsylvania Gov. Ed Rendell announced the state would advance its financially beleaguered capital city, Harrisburg, $3.3 million to prevent a bond default ("Sorry, We Can't Pay," Sept. 15). Most of the funds-including $2.6 million earmarked for municipal-pension assistance and $1 million slated for fire protection-would have been disbursed to Harrisburg in the months ahead. "We're just front-loading it and expediting it," Rendell said.

The second-term Democrat said he acted to prevent a possible seizing up of the municipal bond market. The state also sent the city money to hire a financial adviser. Harrisburg faces another big bond payment in March 2011.

Owed to others

As Washington entered its new fiscal year Oct. 1, its two biggest currency rivals continued to be its two top foreign creditors. China holds roughly $850 billion in U.S. debt (up from $300 billion just five years ago), while Japan holds about $800 billion (an increase from $666 billion). The United Kingdom is in third place, with holdings of about $360 billion (a seven-fold increase from 2005).

When China's holdings are combined with those of Chinese-administered Hong Kong, total Chinese holdings of U.S. debt fall just shy of $1 trillion, close to one-fourth of total foreign ownership of U.S. debt instruments. In all, about 45 percent of the $8.9 trillion in U.S. debt that's "held by the public" is owned outside the United States.

As the fiscal year began, total U.S. debt, which includes not only the debt held by the public but also money the Treasury Department has borrowed from Social Security and various trust funds, stood at roughly $13.5 trillion.
Editor's note: This article has been edited to reflect that China's holdings are combined with those of Chinese-administered Hong Kong.
Joseph Slife is the assistant editor of SoundMindInvesting.com

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