More on Currencies

News Briefs Oman just posted an article about inflation, which mentioned the same indications I mentioned in an earlier post that the U.S. may be giving a subtle green light to currency revaluation in the Gulf.

A Gulf News article is quoted in the post as saying, "If any country is found to be a currency manipulator, it is required to hold talks with the US government." The GN article goes on to state that only one country, China, has been labeled a currency manipulator and that was fourteen years ago, but this is not mentioned in the NBO post. I think that the verbiage that a country is "required" to hold talks is a bit of an overstatement of the power of the U.S. The U.S. cannot require any country to hold talks against its will, unless there is some sort of treaty obligation. Also, dropping the quote out of the context of the GN article, which also references one provision of the law without providing its legal context, gives a false impression of the evil big brother U.S.

The quote references U.S. Public Law 100-148, "The Omnibus Trade and Competitiveness Act of 1988." In section 3004, it states:

"The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade. If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments
adjustments and to eliminate the unfair advantage."

China, for comparison, has a significant bilateral trade surplus with the U.S.: $256 billion in 2007. Oman had a trade deficit of $18.4 million in 2007. UAE's trade deficit was $10 million. Saudi Arabia, due to its oil exports I imagine, had a trade surplus of $25 billion. Bahrain has a very small trade surplus. Therefore, the provisions of the U.S. law, which are not binding on the Gulf countries, do not even apply in the case of most GCC countries. I believe it would be extremely hard to label any GCC state as a currency manipulator in the case of a revaluation anyway. For instance, Kuwait does have a trade surplus of $1.6 billion, but it has already revalued its currency and has not gotten any wrist-slaps from the U.S.

So, I think that the U.S. was encouraging the Gulf countries to hold out on revaluation as long as they could, but the writing is on the wall at this point. And "encouraging" is probably a lot more accurate regarding U.S. power than "requiring." Perhaps I'm wrong, but I think that the U.S. asked and the Gulf leaders decided to oblige up to a point. If anyone has any insights or corrections to my economic ramblings (I'm on thin ice with my economic knowledge here) please comment.