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Reserved for China. Why the Dollar May not Stay Top Dog ForeverSince the global financial crisis began, one of the major surprises has been the continued resilience of the U.S. dollar - despite attacks on the "American-style capitalist model," financial sector weakness, and record U.S. government deficit spending. The dollar today represents almost two thirds of the world's official currency reserves. Its holders presumably believe that it will remain highly liquid, relatively stable in value, and supported by prudent economic policies by the U.S. Treasury and Federal Reserve. Many dollar-watchers have long argued that the dollar will retain this status ad infinitum because there is no viable alternative; any potential alternative would have to be sufficiently liquid to facilitate seamless cross-border investment, trade, and commerce; and the Chinese (who hold the largest share of foreign dollar reserves) would never allow it, since the value of their holdings would drop too much if the dollar were to take a tumble. But in recent weeks, China has begun to address each of these dollar-forever arguments head-on, taking baby steps on the long road toward diversifying away from the U.S. dollar and moving instead toward the establishment of an alternative world reserve currency. The signs began to emerge in mid-March, when Chinese Prime Minister Wen Jiabao publicly announced that he was "worried" about China's exposure to the dollar. Shortly thereafter, Zhou Xiaochuan, the governor of the Chinese central bank, released a policy paper suggesting the creation of a "super-sovereign reserve currency" to replace the dollar as a reserve currency over the long run. Specifically, he suggested the creation of a fund, managed by the International Monetary Fund, through which dollars could be exchanged for Special Drawing Rights (SDRs), an IMF-created international reserve asset whose value is fixed by a basket comprised 44 percent of U.S. dollar, 34 percent of euro, and 11 percent of each pound and yen. The SDR idea drew immediate praise, not only from traditional U.S. antagonists Iran, Venezuela and Russia, (all of whom have been agitating to knock the dollar off its pedestal for some time), but from several other Asian countries, Brazil and several prominent macroeconomists. And it created enough momentum that Gordon Brown added the idea to the agenda for the G-20 Leaders Summit. Though the final G-20 communiqué made no mention of a new reserve currency, what has happened since the meeting demonstrates that the issue remains a live one. Funding increases for the IMF, promised at the G-20 summit, are set to come from two sources: a $500 billion increase in outright funding to the IMF from several member states, and a significant increase in SDR issuance to the tune of $250 billion. While the SDR increase is not likely to have much of an effect on the world's currency markets, it is the first $500 billion that could spark interest among dollar-watchers. Nothing official has been announced so far, but it is rumored that the Chinese will suggest that their contribution of $40 billion could take the form of a purchase of SDR-denominated bonds issued by the IMF. Should this be the case, China would instantly create a AAA-rated, highly liquid SDR denominated instrument that could be traded anywhere in the world. China has also begun to indicate that it hopes to someday make the yuan an internationally accepted currency in its own right. In the weeks surrounding the G-20 summit, China entered into almost $100 billion of currency swap agreements with trading partners as diverse as Argentina, Indonesia, South Korea, Malaysia, Belarus, and Hong Kong. That means that trade between these countries and China is likely to take place more and more through the easiest and most cost-effective means of settlement: the yuan -- not the dollar. Of course, these are small steps, and the dollar is not likely to be replaced anytime soon. But, it would be wrong to simply assume that the currency's dominant reserve position will remain unchanged forever -- a point that China's recent words and deeds should make clear. There's nothing sinister here: China, in exploring alternatives to the U.S. dollar, is merely acting to protect its economic and financial interests. But, with finance and foreign policy traveling in increasingly overlapping orbits, it's best that we not take anything for granted. History demonstrates time and time again the relationship between the ability to print the world's reserve currency and global political influence. Amazon Profits Jump Despite RecessionAmazon.com Inc. announced on Thursday a 24 percent increase in net income for the first quarter of 2009 -- an exceptional number considering the poor state of the economy. The earnings report all but confirms the notion that Amazon, so far, has been recession-proof. The Seattle-based company made $177 million, or 41 cents per share, in the quarter ended March 31, compared to $143 million -- 34 cents per share -- a year ago. Amazon's operating income was $244 million in the first quarter, a 23 percent increase from a year-ago operating income of $198 million. "We're grateful and excited that Kindle sales have exceeded our most optimistic expectations," Amazon founder and CEO Jeff Bezos said in a company news release. Amazon largely attributed its first-quarter success to the new Kindle 2 reader, of which more than 300,000 units have reportedly been sold. Amazon has not, however, released any official sales figures for the Kindle. Chief Financial Officer Tom Szkutak said he is "extremely pleased" with Kindle sales. The company also saw growth in electronics and general products sales. Szkutak said that growth was across a broad range of categories, not any in particular. Sales of products $500 and higher have been growing, but not at the rate they were several quarters ago, Szkutak said in a conference call with news media. International sales went up 15 percent from the first quarter 2008, to $2.31 billion this year. The company said that figure would have been 28 percent if it weren't for unfavorable currency exchange rates. Exchange rates also affected Amazon's net sales, which increased 18 percent to $4.89 billion in the first quarter, compared to $4.13 billion a year ago. The company said net sales would have grown 25 percent if exchange rates hadn't changed. The company also gave credit to its opening of a digital music service in Germany. Amazon, however, is predicting a year-over-year decline in second-quarter operating income by 12 to 49 percent. One factor is that last year's second-quarter operating income included $53 million from the sale of Amazon's European DVD rental assets. "It reflects (that) we've given a wide range," Szkutak said. "And we think it reflects what is appropriate for guidance." The second quarter is traditionally Amazon's worst quarter for growth, however it was the company's strongest last year. GM ‘Likely’ to Build in China as U.S. Factories CloseApril 20 (Bloomberg) -- General Motors Corp., shuttering U.S. plants in a bid to avoid bankruptcy, is “likely” to build a new factory in China on surging demand. “Operations in China are profitable and in the future China can finance its own growth,” Nick Reilly, the company’s Asia-Pacific president, said at the Shanghai auto show today. He didn’t give a timeframe for the new plant. GM, the biggest overseas automaker in China, boosted sales in the country 38 percent last month as government stimulus measures spurred demand for its minivans. By contrast, the company’s U.S. sales slumped 45 percent on the recession, as it battles to convince the U.S. government that it’s still viable. The automaker has also delayed expansion of an Indian plant for as long as two years as sales growth there has slowed, Reilly said. The company will seek to turn around sales in Australia and South Korea, he added. GM is basing its business planning in Asia on the assumption that it will have to finance projects locally, insulating it from possible problems in the U.S., Reilly said. “We won’t get money out of the U.S. into China,” Reilly said. Still, “we don’t need to because we have a very good balance sheet.” China Sales The Detroit-based carmaker said April 9 it expects to double annual sales in China to more than 2 million vehicles over the next five years, with more than 30 new and upgraded models being introduced in that span. GM makes vehicles in China through two ventures, both of which are backed by SAIC Motor Corp. Reilly said he wouldn’t comment on the possibility of Chinese automakers buying GM brands. GM is trying to prove it’s viable in order to keep $13.4 billion in U.S. federal loans. The company is seeking to shed some brands, cut 47,000 jobs worldwide this year and close five assembly plants as it faces a June 1 deadline to avoid a U.S. government-backed bankruptcy. GM will keep its “most profitable” Buick brand, Reilly said. The carmaker is trying to sell or close Saturn, Hummer and Saab out of its eight brands. It’s also studying plans to drop Pontiac and GMC as part of its broader cost-cutting moves, people familiar with the discussions have said. The Chevrolet, Cadillac and Buick brands are likely safe, said the people last week, asking not to be named because decisions aren’t final. GM is ready to cede controlling stakes in Adam Opel GmbH and Vauxhall Motors Holdings Ltd. in exchange for a promise to invest in a new venture formed from those European units, the Financial Times reported, citing two people familiar with the plans. An investor will be asked to pay at least 500 million euros ($650 million) in equity for the units, while GM will inject the money directly into Opel, the newspaper said. Ford posts $1.4 billion Loss, Depletes less of its Cash While Restructuring Without Gov't AidDEARBORN, Michigan (AP) — Ford Motor Co. reported a first-quarter loss of $1.4 billion Friday and said it depleted less of its cash, emphasizing that it doesn't expect to seek any of the government assistance that is keeping the rest of the Detroit Three alive. The second-largest U.S. automaker said it spent $3.7 billion more than it took in during the first three months of the year, far less than the $7.2 billion it spent in the fourth quarter of 2008. Ford shares climbed 69 cents, or 15.5 percent, to $5.18 in midday trading. Chief Financial Officer Lewis Booth said the company is confident that it will slow the drain on its cash even further this year, and he said Ford will make it through 2009 without needing government aid. He would not speculate, however, about 2010. "This is a very, very difficult environment," Booth said. "We're comfortable we'll get through this year." Ford said it cut structural costs by $1.9 billion, adding that it is likely exceeding its $4 billion cost-cutting goal for the year. "We are off to a very good start," CEO Alan Mulally said in a conference call with reporters. "So we believe that we will be able to exceed that target for the year." Ford said it remains on track to break even or post a profit on a pre-tax basis in 2011. While General Motors Corp. and Chrysler LLC have accepted $17.4 billion in federal aid and are racing toward deadlines to make deep cuts or file for bankruptcy, Ford was the first U.S. automaker to modify its contract with the United Auto Workers union and strike a deal to make up to 50 percent of payments to a union-run health care trust in stock instead of cash. The company also completed tender offers to reduce its debt by more than one-third. The company said the moves would result in annual savings of $1 billion. Ford drew the last $10.1 billion from its revolving line of credit during the quarter and said it had $21.3 billion in cash as of March 31. That's down from $28.7 billion in the same period last year. Ford's first-quarter loss compares with a $70 million profit a year earlier. On a per share basis, Ford lost 60 cents, compared with earnings of 3 cents a share for the comparable quarter a year ago. Revenue was $24.8 billion, down nearly 37 percent from $39.2 billion in the same quarter of last year, as Ford's U.S. sales declined 43 percent. On a pretax basis excluding special items such as a gain from its March debt exchange, Ford lost 75 cents a share, beating analysts estimates. Eleven analysts polled Thomson Reuters expected a $1.23 per share loss on revenue of $22 billion. Booth called the first-quarter performance "solid" compared with Ford's fourth-quarter loss of $5.9 billion, which led to a $14.6 billion loss for 2008, the worst annual loss in the company's 106-year history. "I think the important comparison for us is, 'are we improving versus the fourth quarter?' Because the fourth quarter, things were really dreadful," Booth said. He said cost cuts and better pricing for its vehicles helped the company narrowed its losses, and he expects continued improvement for the remainder of the year. One day after GM said it would temporarily close 13 North American plants for up to 11 weeks this summer to slash production, Ford said it has increased its second-quarter production forecast to 902,000 units, up 19.5 percent from the first quarter. North American production is expected to rise 25 percent to 435,000 vehicles. The increase is due to seasonal adjustments and because of first-quarter production cuts to reduce dealer inventory. Ford shut down 10 North American assembly plants for an extra week in January to deal with the auto sales slump. "We believe, with the decisive actions we have taken over the last few quarters, we have the dealer stocks well in line and with what we see with the reception of the new products," Mulally said. "We believe we can go up a little bit more to support the real demand." Should GM or Chrysler, or even a key supplier file for bankruptcy, Ford's production is likely to be affected. Ford is working with suppliers that would be affected by a filing, and Mulally said the company has met with the government's auto task force to help it "understand the importance" and "interdependencies" of the supply base. "The health of the supply base is probably the most critical issue as the government helps GM and Chrysler restructure," he said. "I think they will continue to pay the highest priority as they restructure to the supply base to make sure it stays intact for all of us." Special items improved Ford's earnings by $362 million. The company's $1.1 billion gain on its debt exchange was offset by a $664 million impairment charge due to a reduction in the book value of its Swedish Volvo unit. Ford classified Volvo as "held for sale," meaning that it's likely the unit will be sold in the next 12 months. UK economy 'weakest in 30 years'The UK economy shrank 1.9% in the first three months of 2009, according to gross domestic product (GDP) data from the Office for National Statistics. The contraction was much worse than had been expected and was the biggest three-month decline in GDP since the third quarter of 1979. "It's the weakest in 30 years - that's extremely soft," said George Buckley at Deutsche Bank. GDP measures the value of all the goods and services produced by a country. A decline of about 1.5% had been expected following the contraction of 1.6% in the previous three-month period. Taken together, it was the worst six-month decline in GDP since the ONS began publishing the figures. 'Weakness to come' The ONS figures also showed that GDP for the year to the end of March was down by 4.1%. The latest figures mean that GDP has now shrunk for three quarters in a row, and confirm that the economy is still deep in recession. The biggest contributor to the decline was the manufacturing sector, which shrank by 6.2% in the first three months of the year, having decreased by 4.9% in the previous quarter. "The last six months has seen the sharpest fall [in GDP] on record and the manufacturing number... is a record," Jon Beadle from the Office for National Statistics (ONS) told the BBC. Treasury minister Yvette Cooper: 'The economy will start to recover towards the end of this year' Only two sectors managed any growth at all: government output and the agriculture, forestry and fishing sector, both grew 0.3% in the period. Analysts suggested that this would be the worst contraction in the current recession. "I very much doubt that GDP is going to contract at these sort of rates for any longer, but I do think it will still contract all throughout 2009," said George Buckley at Deutsche Bank. "So there's still a lot of weakness to come, but not as weak as we're seeing today." Gloomy forecasts The worse-than-expected figure casts doubt on the chancellor's prediction that GDP for the whole of 2009 would only shrink by 3.5%. How to cope with recession "A contraction of at least 4% is much more likely," said Benjamin Williamson at the Centre for Economic and Business Research. "Our latest forecast is for a 4.5% contraction this year, making 2009 the steepest single year contraction in economic activity since the 5.1% fall in 1931." The International Monetary Funds predicted a 4.1% decline for 2009. Chief Secretary to the Treasury Yvette Cooper said the government stood by its forecasts. "We believe the economy will start to recover towards the end of this year," she told the BBC. 'Optimistic' But Conservative leader David Cameron said the figures showed the government had a wildly optimistic view of the state of the UK economy: "The chancellor gave a set of forecasts in the Budget," he said. "Everyone said they were over optimistic, and already, just a few days later, the next lot of official figures coming out shows that he's been over optimistic, shows that what the government's been doing hasn't been working." James Knightley, an economist at ING Bank, said: "Today's GDP report does again highlight how optimistic Chancellor Darling was in his budget assumptions." Alistair Darling had also predicted that GDP in the first three months of the year would be at a similar level to that seen in the previous quarter. The ONS cautioned that the GDP figure was only its preliminary estimate and could be revised. There was some better news for the economy in the latest retail sales figures. Retail sales unexpectedly rose 0.3% in March, making them 1.5% above the level seen in March 2008. |
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