The Pound, The Dollar, And All That

The pound has bucked up this week as those foolhardy forex traders get a whiff of risk appetite returning. Yesterday’s pick up in risk appetite is contrary to the weak fundamental data that is emerging from Asia as a global recovery came under question. A record 1.1% drop in Japanese inflation helped rekindle these concerns.

The BoE has recently warned that UK banks may need to curb lending by as much as 500 billion pounds over the next four years as the government removes aid. This could limit future growth for a country as it is already facing the prospect of an increasing tax burden.

This pick up in risk appetite has weighed on the dollar, along with renewed appeals from the People’s Bank of China for a so-called “super-sovereign” currency. China, and Russia too, are becoming increasingly concerned about the size of dollar-denominated assets that they hold.

"An international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis," says the PBOC.

A China Daily article estimates that 70 percent of China’s $1.95 trillion foreign exchange reserves are in US dollars.

Whilst the idea of a super-sovereign currency makes sense, the US would probably veto any replacement of the US dollar, which enables it to borrow more easily.

I can see it happening in the long-run but not anytime soon. China has got itself caught between a rock and a hard place, it can hardly cash-in it's $1.5 trillion just like that without causing a massive run on the dollar, thereby causing the very thing it is trying to avoid.

Slowly, slowly, catchy monkey. With fried rice, please.