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PIMCO Sees An End To The Currency Wars

Tyler Durden's picture


One of the prevailing themes in FX land over the past year, courtesy of prevalent central bank intervention in the monetary arena, has been a pervasive conflict among the world's money printers whereby those who have been unable to keep up with the Fed's fiat printing, have been engaging in direct open market purchases of USD to keep their own currencies lower, and thus promote exports, etc. The fact that currency exchange rates have been as unstable as they have since the start of QE 1, and especially QE 2, is in our opinion, a main reason for the outflow of trading volume from equity markets and into venues that exhibit the kind of volatility desired by short-term speculators, such as FX. Today, PIMCO's Clarida, in an informative Q&A, proposes that the currency wars we have all grown to love so much over the past year, are coming to an end. The implications of this assumption are indeed substantial. While we do not agree with the assessment, it does merit further exploration, especially since it touches on PIMCO's outlook for the dollar: "In our baseline case we do
not see the dollar being supplanted as the global reserve currency in
the next three to five years. If foreign central banks were to decide
that they did not want to hold dollars as a reserve, they would have to
hold some other currency. And right now there is not a single viable
alternative to the dollar. Aside from the 60% that I mentioned earlier,
global reserves include about 30% in euros and the rest is mixed. Given
current circumstances in Europe, we would not expect the euro to
supplant the dollar
." Oddly, there is still no mention of such currency alterantives as precious metals, which as the Erste Bank report noted yesterday, has already set the groundwork for a return to real sound money. Much more inside.

From Pimco's Richard Clarida on The End Of Currency Wars

  • International
    capital is flowing to countries with good growth prospects and to
    countries with central banks confident enough to raise interest rates.
  • Certain nations are placing controls on capital or intervening in
    currency markets with an eye to maintaining economic competitiveness.
  • We see central banks in the U.S. and the U.K. winding down monetary
    stimulus that has exacerbated the situation. Also, we see potential for
    emerging market currencies to appreciate, and that may give developed
    nations a boost.

Nations generally benefit when their currency valuation is low enough to
assist domestic industry, making their exports cheap and imports
expensive. But when a trading partner intervenes in currency markets to
enforce a low valuation, then international tension may arise.

the fourth of a series of Q&A articles accompanying the recent
release of PIMCO's Secular Outlook, portfolio manager Richard Clarida
discusses PIMCO’s outlook on currencies and argues that global currency
tensions may ease in the years ahead.

Q. Could you
discuss efforts some nations appear to be taking to direct the exchange
value of their currencies to favor domestic industry? Is this a source
of long-term global tension (previously some media reports spoke of
“currency war”)?

Clarida: Taking a
step back, our secular outlook for the next three to five years is for a
two-speed global recovery with emerging markets (EM) leading the way.
One natural consequence is that international capital is flowing to
countries with good growth prospects and also to countries with central
banks that have the confidence to raise interest rates. Much of the
focus, rightly, has been on emerging markets, but developed nations such
as Australia, Canada and Norway have been hiking interest rates, and
their commodity producers are benefiting from booming emerging growth.

countries are resisting the upward pressure that these capital flows
are putting on their exchange rates. They are placing controls on
capital or intervening significantly in currency markets with an eye to
maintaining economic competitiveness. We do see this dynamic as a source
of long-term global tension, but we believe it is a tension that most
likely will be manageable. For example, we see central banks in the U.S.
and the U.K. winding down monetary stimulus that has exacerbated the
situation; rate hikes could be on the horizon in 2012.

Q. Could you elaborate on how PIMCO sees this issue playing out?

Clarida: If
indeed emerging economies are to continue to be centers of global
growth, then at some point we believe they will move toward more of a
local-demand-driven economic model and away from an export-reliant
model. We see currency adjustment as part of that rebalancing. 

me explain this dynamic. Think of an emerging economy with very rapid
productivity growth – the amount of goods and services it can produce
each year is expanding. If this hypothetical country relies on export
demand, it requires a relatively weak exchange rate to absorb more and
more supply. If this country fears export demand is tapering off, it may
shift focus and begin nurturing domestic demand – selling local goods
to local customers. But if goods and services shift to domestic demand
that creates scarcity on the global market and prices rise. So to
maintain domestic demand the emerging nation allows its currency to
appreciate, which enables domestic consumers to compete globally.
Theoretically, this eases global tensions and gives developed nations a
boost: since their currencies are relatively cheaper their exports
become more competitive.

Q. What does PIMCO mean when it speaks of a trilemma dilemma?

Clarida: The
trilemma is a fundamental concept in international finance developed by
Nobel laureate economist Robert Mundell, and the basic idea is that for
any national economy operating in a broader global economy, there are
three desirable outcomes. National leaders want an independent monetary
policy that suits domestic circumstances. They want to benefit from the
free flow of capital, especially capital inflows directed toward
economic investment. And they want a stable exchange rate. 

trio is called a trilemma because theory and experience suggest at most
a nation can only achieve two of those objectives. Thus, international
policy making is always about trading off the desirability of exchange
rate stability, monetary independence and capital flows. The U.S., for
example, has had an independent central bank and certainly benefits from
an open capital market reflected in our current account deficit – we
borrow from the rest of the world. But the dollar fluctuates not only
with U.S. events but also with global ones. China, on the other hand,
has a very stable exchange rate because they manage it, and their
central bank has some leeway to influence domestic interest rates. But
China has restricted capital mobility.

Q. Is the U.S.
dollar slipping as the world’s reserve currency? Which currency or
currencies will dominate global commerce in the years ahead?

Clarida: The
dollar’s preeminence dates to the end of World War II with the Bretton
Woods global agreement on monetary management. That formal system
unwound in the early ‘70s, but the dollar has continued to serve as the
global reserve currency. But note that the share of dollars in global
central bank portfolios has been declining slowly for the last eight to
10 years. According to the International Monetary Fund, about 60% to 65%
of global reserves held by emerging nations are in the form of dollars,
down from about 70% a decade ago.

In our baseline case we do
not see the dollar being supplanted as the global reserve currency in
the next three to five years. If foreign central banks were to decide
that they did not want to hold dollars as a reserve, they would have to
hold some other currency. And right now there is not a single viable
alternative to the dollar. Aside from the 60% that I mentioned earlier,
global reserves include about 30% in euros and the rest is mixed. Given
current circumstances in Europe, we would not expect the euro to
supplant the dollar.

I should point out that although there are
privileges that accrue to the provider of the global reserve currency
such as cheaper access to global funds, there are also obligations. In
periods of financial turmoil or geopolitical turmoil, we tend to see the
dollar become more volatile and to appreciate sharply in the
flight-to-quality trade. I suspect there are not many policymakers in
the world that would like that loss of control and certainty about their
currency valuation.

Q. How should investors approach
currency investing both in terms of hedging and seeking investment
returns? What are the opportunities and risks?

Clarida: At
PIMCO, we like to separate in our own minds an investment decision on a
security with a separate decision on whether we want to take the
related currency bet. In today’s markets, investors are generally able
to hedge currency exposure. 

Also, certain PIMCO strategies may
invest directly in currencies. Broadly, our approach to investing in
currencies is to think of them as a way to express our macro views about
opportunities in a number of countries.

With our New Normal
worldview of headwinds to growth in developed markets and tailwinds in
emerging markets, we now generally look at emerging market and G-10
currencies simultaneously and with the same analytical framework. As I
discussed earlier, we anticipate EM policymakers will allow their
currencies to appreciate in the years ahead as they nurture domestic
consumption. And in contrast to the ‘80s and ‘90s, in recent years EM
currencies have been less volatile than G-10 currencies. Thus, EM
currencies can be attractive opportunities.

Of course, as with
any financial investment, there are risks to investing in currencies.
The primary risk, in our view, is that there are periods in which
volatility spikes and in which there are potentially significant drops
in a currency’s relative valuation. There is a saying in the foreign
currency markets that currency trades work until they don’t. And so
certainly anyone thinking of investing in currencies should also
consider if portfolio managers are appropriately factoring in such tail
risk. That is certainly a focus at PIMCO.


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Tue, 07/05/2011 - 09:30 | 1426277 qussl3
qussl3's picture

Well they can always buy the RMB.


Tue, 07/05/2011 - 10:18 | 1426367 trav7777
trav7777's picture

ROTFL...a currency backed by even more bad debt than the dollar.

The truth of what PIMPCO says is that the dollar is a piece of trash but that there is nothing nontrashy that's out there as an alternative that banksters can still print.  Therefore, it's the do-nothing case

Tue, 07/05/2011 - 10:31 | 1426409 qussl3
qussl3's picture

The dollar is a piece of trash with the biggest stick in the history of mankind.


Tue, 07/05/2011 - 11:09 | 1426507 Popo
Popo's picture

It is politically incorrect to say this, but when people call the dollar "unbacked",  it's important to bring it up:

When you have (by far) the strongest military in the history of the world, your currency is hardly unbacked.

Furthermore:  The US military buys the United States control of the Middle East.  Look at a map of US military bases and try your hardest to avoid the obvious truth that the US Military Empire is an oil empire.    

If the United States dollar was a piece of toilet paper, as you suggest -- it would not be as strong as it is.

Of course,  the US military empire isn't doing so well -- which is contributing to the dollar's decline.  And the dollar will likely continue to decline.  But to suggest that the dollar is "unbacked fiat" shows great ignorance of the global economy and balance of world powers.   The dollar's value has always been backed by the military, which enforces oil treaties, which in turn forces oil to be traded in US currency.




Tue, 07/05/2011 - 12:17 | 1426693 Ghordius
Ghordius's picture

+1 I can't agree more.

Popo, I get a serious case of Cognitive Dissonance when I see your avatar and pen name vs what you actually write

Tue, 07/05/2011 - 13:50 | 1427099 oldman
oldman's picture

Thanks, t777

"Therefore, it's the do-nothing case"

Now, that say a lot!

on behalf of the 'do-nothing dudes'

Tue, 07/05/2011 - 09:33 | 1426280 snowball777
snowball777's picture

And right now there is not a single viable alternative to the dollar.

Intentional blindess, bitchez

Tue, 07/05/2011 - 09:49 | 1426309 SheepDog-One
SheepDog-One's picture

Wow, no alternative to the worthless dollar. Insane.

Tue, 07/05/2011 - 10:03 | 1426335 fuu
fuu's picture

Totally OT but when were we invading Iran again? I was sitting around with popcorn all weekend and nothing happened.

Tue, 07/05/2011 - 10:52 | 1426476 Mad Cow
Mad Cow's picture

The best thing to do, is to just keep a steady flow of popcorn.

Tue, 07/05/2011 - 10:08 | 1426343 DosZap
DosZap's picture


Amazing is it not?.

Not a single one out globally more valuable than the worthless USD.

This SCREAMS for honest money.

Gold & Silver.

If only the masses would awaken.There are numerous currencies that are FAR ahead of the USD in value, and their economies far more stable.

Tue, 07/05/2011 - 10:17 | 1426364 TK69
TK69's picture

For example?

Tue, 07/05/2011 - 10:21 | 1426377 fuu
fuu's picture

Yes what we need are currencies dependant on 2 separate utilities.

Tue, 07/05/2011 - 09:47 | 1426294 White.Star.Line
White.Star.Line's picture

The currency wars are playing out like a juvenile comedy.

The headlines are hilarious-
Monday - Dollar up against Yen, down against Euro
Tuesday - Euro falls on debt worries, dollar down due to oil supply worries. Wednesday - Swiss Franc rises as safe haven, Euro, Dollar down
Thursday - Dollar, Sterling rises as PM's lose appeal
Friday - Deflation fears in the morning causes all fiats to rise, inflation fears in the afternoon causes them to fall.

The currency wars are nothing more than bankrupt nation's throwing marshmallows at each other.

Tue, 07/05/2011 - 09:43 | 1426296 RobotTrader
RobotTrader's picture

I wonder how the Forex Megadroid "Let the money roll in" programs have fared this year???

Tue, 07/05/2011 - 11:21 | 1426541 Orly
Orly's picture

Not wonderfully.  I sense that giant banks were using it to trade Euros, in an inverse fashion, of course.

I don't know about stocks but it seemed that every time there was a sell signal in Euros (on an H4, Daily or Weekly chart...), by some miracle, some fantastic announcement would be made that roundly destroyed that technical set-up.

It is still going on.  Just last week, it was...gasp!...another round of the Chinese will buy it all.  Just how that would happen, so one seemed to care.  It seems the half-life of these deliberate machinations is running shorter and shorter, so we'll see what happens.


Tue, 07/05/2011 - 09:45 | 1426301 nathan1234
nathan1234's picture

After all it's just paper. Print some, swap some and trade some. You think the bankers with their no trading loss will ever give up this lucrative trade!. Like asking the Fed to quit and repeal the Act

Tue, 07/05/2011 - 09:48 | 1426305 SheepDog-One
SheepDog-One's picture

Sure there will be an end to the currency wars, when they surprise everyone with a sudden world collapse, and 'Phoenix' it all back with a new 1 world currency, 1 world govt. Duh.

Tue, 07/05/2011 - 09:48 | 1426306 Tense INDIAN
Tue, 07/05/2011 - 09:55 | 1426318 iLoveMisesToPieces
iLoveMisesToPieces's picture

No alternative my ass.  Creditors are going to get bored with being paid back in worthless paper at some point.  There will be a sound currency introduced in the next two years out of necessity.  Then it's Gresham's law, bitchez.

Tue, 07/05/2011 - 11:57 | 1426641 rufusbird
rufusbird's picture

As iLoveMisesTo Pieces points out, things can change. The resulting chaos will be caused by lack of a widely accepted alternative...

Tue, 07/05/2011 - 09:59 | 1426321 iLoveMisesToPieces
iLoveMisesToPieces's picture

double post

Tue, 07/05/2011 - 09:59 | 1426327 dark pools of soros
dark pools of soros's picture

they'll let the debt mountain climb for a long time..  since only the sheeple have to climb it (or so they convince them too)

Tue, 07/05/2011 - 10:15 | 1426354 topcallingtroll
topcallingtroll's picture

We may see goldilocks or mild contraction for a while.

Tue, 07/05/2011 - 10:28 | 1426404 swissinv
swissinv's picture

At the end of the day its all about the dollar and I'm afraid, the US cannot afford high interest rates. I also highly doubt that US could afford to default without losing the reserve currency status. Losing the reserve status means that oil is getting f... expensive. I still believe in a Q3 and further currency wars. I migh change my opinion when a integer and credible person such Ron Paul is running goverment. However, shall he find out that Fort Knox is empty, he has no other choice to cump up with Bernanke and co.

Tue, 07/05/2011 - 10:33 | 1426415 proLiberty
proLiberty's picture

Since all these central bankers went to the same schools and learned from the same textbooks and most importantly only follow Keynes, they are all in the same social club when the meet at Davos.  They wink and nod with each other, and support each other by "co-inflation".  If they all inflate at about the same rate, the FX cross never changes much and nobody gets alarmed.  However, over time, commodities will respond which we see in gold, oil and cotton. 

When coupled with a tax on incomes and especially on nominal gains of assets, this is the biggest scheme of theft by government in all human history.



Tue, 07/05/2011 - 10:46 | 1426454 cranky-old-geezer
cranky-old-geezer's picture

When coupled with progressive tax on incomes and siphoning off your purchasing power, this is the biggest scheme of theft by government in all human history.

There, fixed it.

Tue, 07/05/2011 - 12:57 | 1426831 iLoveMisesToPieces
iLoveMisesToPieces's picture

And not to mention the fact that in order to have a functioning economy, you need a funtioning capital market.  They keep inflating and inflating and all the hot fiat will continue to chase Groupon IPOs and NFX and other stuff that does absolutely nothing for organic ecnomic growth.  Why take the risk of what could be the next be thing when you can take the sure bet of pump and dumping the heard with freshly printed money?

Tue, 07/05/2011 - 10:40 | 1426437 cranky-old-geezer
cranky-old-geezer's picture

PIMCO Sees An End To The Currency Wars

Yea, when they all turn to toilet paper.

Tue, 07/05/2011 - 11:25 | 1426557 InvalidID
InvalidID's picture

 Nice to see PIMPCO catching up. This was old news a month ago.

To Quote myself here on ZH a week or two ago:


 So basically, all we need is for the dollar to be the last man standing. Doesn't matter if that last man has been beat to shit, he's all there is.


Ben the Bankie has succeeded in putting the world in it's place (as seen by him of course) in cornering the Chinese and Bitch slapping the Euro around like a pimp.

Tue, 07/05/2011 - 11:47 | 1426605 Orly
Orly's picture

Saw the movie Centurion the other day.  Definitely worth the dollar rental, though a strong caution is in order for gore and blood.  I never knew about the Roman Ninth Legion.

In it, two soldiers are running from wolves; one a weakly but conniving Roman regular and the other a conscript from Namibia.  Needless to say, the African was far out-running the other, so the Italian feigned an ankle injury and fell to the ground, writhing in "pain."  Out of kindness, the Namibian returned to help the man move along, lest he become feral canine breakfast.  In return for the kindness, the sleazy Roman slit the conscript's Achilles tendon, got up and ran away.

It's the old story: I don't have to run very fast; I just have to run faster than you.


Tue, 07/05/2011 - 12:02 | 1426654 rufusbird
rufusbird's picture

 the conscripts name was Lehman Brothers...

Tue, 07/05/2011 - 12:04 | 1426665 Orly
Orly's picture


Tue, 07/05/2011 - 12:10 | 1426677 InvalidID
InvalidID's picture


 I was thinking Northern Rock... Somehow no ones talking about England, but that's where this all started.

Tue, 07/05/2011 - 12:12 | 1426683 Orly
Orly's picture

No offence but it seems that's the way They want it.  If the truth about the UK financial system were to come out, it would be game over.

Tue, 07/05/2011 - 12:27 | 1426733 InvalidID
InvalidID's picture


 I couldn't agree more. Everyone is looking at China, America and, Greece. Fact is on a per capita basis England is in worse shape than any of the above. Last time I checked external debt in England is somewhere in the neighborhood of 140k per person, meanwhile we're worried about Greece with an external debt of under 50k per person. (Those numbers are going to be a bit outdated, so don't bash me over the head with em)

 The real catch is that England doesn't produce ANYTHING.

Tue, 07/05/2011 - 13:11 | 1426906 lookma
lookma's picture

Who knew, somebody doesn't know what the hell they are talking about:

Aside from the 60% that I mentioned earlier, global reserves include about 30% in euros and the rest is mixed. Given current circumstances in Europe, we would not expect the euro to supplant the dollar." Oddly, there is still no mention of such currency alterantives as precious metals,

Hmmm, I wonder why someone would think a comment pointing out the EURO had risen to @30% of world currenecy reserves has nothing to do with gold???

 It appears the commentator is woefully ignorant of the most rudimentary basics of the euro.  Go look here ( and tell us about the most prominent asset on the balance sheet (hint - its the one listed first).  Then maybe mess around at FOFOA's blog, perhaps you could start here -

Learning - its not just for smart asian kids anymore!!!!  Shocking as it is, anybody can do it!!!!

Tue, 07/05/2011 - 13:19 | 1426960 InvalidID
InvalidID's picture

 A couple of problems arise when we say things like the Euro is backed by gold.

  • We assume you would be allowed to cash in on that.
  • We assume there is really as much gold as stated. I have as much faith in the Euro's gold stock pile as I do in Fort Knox.
  • This is the killer. In a world of fiat currency why would you back your money with gold? If I can print trillions of dollars out of thin air and buy gold backed Euro's, then cash in on said gold... See the problem here?
Tue, 07/05/2011 - 14:42 | 1427142 oldman
oldman's picture

"This is the killer. In a world of fiat currency why would you back your money with gold? If I can print trillions of dollars out of thin air and buy gold backed Euro's, then cash in on said gold... See the problem here?"

I don't see a problem with buying a gold backed currency, letting the dollar tank and then buying in your debt at 20 cents on the dollar.

especially when gold is so cheap;

and we don't have any gold in ft knox;

and we would never allow our gold to be cashed in on except in default---never traded for paper

been wondering for five years now what is really going on at the fed----could be the trade of all-time

next best thing: do-nothing and allow the universe to work it out


Tue, 07/05/2011 - 16:46 | 1427685 InvalidID
InvalidID's picture


 I'm not sure I follow you. Who doesn't have gold in Fort Knox?

 Who wouldn't allow gold to be cashed in?

 Who's going to buy dollar backed debt for .20 on the dollar? T-Bills are going for negative returns right now.

 Lastly, how exactly is gold cheap?

Tue, 07/05/2011 - 19:02 | 1427873 oldman
oldman's picture


All of the conspiracy theories in the world may not sway me, but some dreams are to powerful to ignore; I will give you a laugher because if anyone told this story to me I would laugh, though silently out of respect for the power of the universe.

A few years ago, I awoke from a dream in which someone told me; thereis no gold in ft. knox, bush1 took it and no oil in those salt domes because bush 2 took that.

I was wowed by this dream for several days and then decided to write a novel about it, but had no technical knowledge with which to make a believable tale, so I let it go.


Now, the IEA is doing something very silly and maybe the reason that the US is a part of it is that there is no strategic oil reserve, and this is a good time to turn that deficit into a cash cow-----digital accounting, i understand, is marvellous with the guns, media, and power on one side.

Now, all of this flap about an audit of ft. knox is unsettling me----what if----? And no I do not know a thing about the mechanics-----tungsten bars, german bars, no bars-----we, hopefully, will have an audit to put all of this to rest.

Now, if we had a gold-backed currency, it could be part of the indenture of bonds that they would be redeemable in specie only in the case of a default at whatever value the pricing mechamism was at the time of issue.

A de facto gold-backed currency is CHF because the Swiss do have enough gold to back theircurrency and the will to stave off 'austerity' with their discipline. Trade cheap dollars for CHF, tank the dollar, and buy'em back; that's what I'da done along time ago rather than attack other nations as a goddamned foto-op to be elected---I'm a violent guy, but one who has sworn not to use violence, so this would be my only alternative, probably.

And why I espouse 'do-ing nothing' as an escape route from this matrix we have accepted as reality---

I'm not a trader or traitor, but in my day which was 20 years ago any bankrupt bid was about 20% with me always coming up empty-handed with an unanswered bid at 15%-----You remember WPPS 4%5, i suppose?


Gold is cheap at $ 1500/oz up to $2500 for me because losing on this play is a zerohedge: my income is in US$.

T-bills are a cash instrument and a negative yield is what they are worth considering the fees charged by the banks here with a near 0% return.

So there you have my reasons and a long boring tale about a do-nothing dude who wants only "to live in a healthy and happy community that includes all species and our mutual habitat"(My political affiliation).

End of story and too damn wordy, at that---I apologize ahead of time, my friend. 





Tue, 07/05/2011 - 16:03 | 1427560 Urban Redneck
Urban Redneck's picture

The war can't be over - no one has won yet.  Besides the central bankers have been "innovating" so much in recent years in the domestic ops side of the monetary policy shop, that there are a dozens of other tricks they can deploy.  If the war is actually over then there must be peace (or at least calm) in currency markets- which seems rather unlikely since the opportunities for making big profits or receiving big bailouts are almost non existent in a market with no volatility or volume.

Tue, 07/05/2011 - 16:43 | 1427671 InvalidID
InvalidID's picture

It's possible the war is over (or nearly so) because the other guys have surrendered. If this is the case we'll see an orderly breakup of the Euro, or something resembling it. Also, China's peg to the dollar will loosen.


 If not, war on.

Tue, 07/05/2011 - 19:05 | 1428033 something fishy
something fishy's picture

Perhaps this means our old friend the carry trade is back

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