It’s time for our weekly financial summary. The Fed’s move in QE2 is being criticized internationally, though we think the criticism right now is pro forma. Countries with large trading surpluses with the US have been upset by the US move to effectively devalue its currency, and that includes Germany, Brazil, and of course China. We noted earlier that QE was had the effect of manipulating exchange rates, though of course other countries could take steps to devalue their own currency to compensate, or initiate their own QE programs.
The pressure that will be brought to bear on the US at the G20 meeting isn’t really expected to cause it to reverse its decision, or probably even to discourage further similar moves. It’s all part of a global trend to try to gain advantage through exchange rates—the “currency war” that the ECB has been concerned about. Emerging markets with large trade surpluses want a strong dollar, meaning one that favors their imports in US markets. US manufacturers would benefit from a weaker dollar, though consumers might like a strong dollar because it would lower the prices for popular foreign-built items. The real lesson of the G20 protest is that we’re not out of the woods on broader currency battles yet.
In the US, jobless claims fell sharply, largely in the retail sector as companies hired to fill sales slots in anticipation of the holiday season. It would be better to see manufacturing jobs, of course, but retail gains are a sign that companies expect a better holiday season than last year. That could draw down the inventory levels that manufacturing gains in the early part of this year had built up, which would then encourage further manufacturing growth in 2011.
Things are a bit spottier in Europe, where the improvements in the Greek debt problem aren’t yet spreading to other at-risk countries like Ireland, Portugal, and Spain. I think that the US believes the Eurozone should be doing more to boost its own economy; that it’s relying on stronger US imports (boosted by a strong dollar relative to the Euro) to drag the rest of the world up. The debt problem illustrates the challenges in that approach, because the individual countries in the zone are still sovereign and independent with respect to their own budgets and financial policies, and too much public stimulation that creates debt will threaten the weaker members further. Germany, who is one of those opposing US actions and depending on exports to the US, could surely do more to help its Euro partners but the decision would be politically impossible there, just as a decision to let the US economy stagnate would be indefensible here.
Every country, including the US, does pretty much what it thinks it has to in order to support its own interests. The excesses this could create are mitigated largely by fears of starting a global trade/currency war. What we have to look for now aren’t signs of business as usual, but signs that something new and bad might be happening. So far, I don’t see it.