Renminbi falls and policy shift

By Peter Garnham   Published: July 21 2008
The Chinese renminbi fell for the third consecutive day on Monday, sparking speculation that its continued appreciation might not be a foregone conclusion.

The renminbi has risen more than 6 per cent against the dollar this year as the Chinese authorities have used the currency as a tool to dampen inflationary pressures in the country’s overheating economy.

By midday in New York, the renminbi dropped 0.2 per cent to Rmb6.8290 against the dollar after the People’s Bank of China fixed the currency’s daily mid-point lower for a third successive day.

Gabriel Stein, of Lombard Street Research, said that, while the move could just be put down to “normal daily fluctuations”, the Chinese ministry of commerce had called for a slower pace of renminbi appreciation.

Wen Jiabao, the Chinese premier, has talked about helping China’s exporters.

“It could be the beginning of a policy shift,” said Mr Stein. “It could also be an attempt to stave off speculative capital inflows by showing that renminbi appreciation is not a one-way bet.”

Elsewhere, the dollar recovered from early sharp losses after expectation-beating earnings figures from Bank of America, the second-largest US bank, eased some fears over the health of the US financial system.

But analysts said the focus would now turn to second-tier US banks – which were expected to be more vulnerable to credit-related losses – reporting this week.

Gavin Friend, of Commerzbank, said US economic releases this week – including jobless claims figures, housing data and durable goods orders – were unlikely to support the dollar, which last week fell to a record low against the euro.

“The market is worried about possible stagflation in the US and maintains its rather dollar negative mood,” he said.

Late in New York the dollar was down 0.4 per cent to $1.5898 against the euro, lost 0.2 per cent to Y106.70 against the yen and eased 0.2 per cent to SFr1.0202 against the Swiss franc.

The dollar was flat against the pound at $1.9987, after comments from David Blanchflower, a member of the Bank of England’s monetary policy committee.

Mr Blanchflower called for cuts in UK interest rates, saying he suspected the UK was already in recession and the economy faced three or four quarters of contraction.

Although he is known as the most dovish member of the MPC, analysts said Mr Blanchflower’s comments were noteworthy given the depths of his concerns over the UK economy.

“He believes the downside risks to the UK economy from falling house prices and the credit crunch could be even greater than they are in the US,” said Howard Archer, of Global Insight.

The pound fell 0.1 per cent to £0.7945 against the euro and fell 0.1 per cent to Y213.32 against the yen.

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