Corporate Profits Buoyed by Forex Gains

While the American economy is sputtering, US corporations are earnings record profits and stock market capitalization is soaring. These seemingly contradictory trends are being driven by the decline in the USD. Multinational corporations, especially those based in the US, are conducting a growing portion of their business abroad and subsequently, their foreign sales are booming. When corporations convert these profits from the currencies they are booked in back to USD, on which their financial statements are based, they are realizing the equivalent of a 5-10% bump from foreign exchange gains. Many of these companies are web-based, such as Yahoo, Amazon and eBay. Ironically, as the economy sags, betting on these types of companies may be akin to a bet against the USD.

China Increases Yuan Trading Band

China Increases Yuan Trading Band

In a sop to western policymakers, China recently announced that it would widen the Chinese Yuan’s daily trading band, from .3% to .5%. In theory, this means the Yuan will now be permitted to fluctuate by up to .5% per day against the USD. In practice, however, the Yuan’s daily rate of appreciation probably won’t exceed .05%, and only then on an especially volatile day. Two years ago, China revalued the Yuan and since then, the currency has appreciated at an annualized rate of 3%. However, the west was not mollified, and continued to pressure China relentlessly to allow the Yuan to appreciate further. Unfortunately for the west, this latest policy change is unlikely to have any practical impact on the valuation of the Yuan, as analysts are predicting the currency will appreciate by only another 3% this year. Bloomberg News reports:

The yuan never moved the maximum permitted under the previous limit. It moved 0.13 percent from the daily reference rate on April 16, the most this year, according to Bloomberg data.

Asian Nations Form Forex Bloc

The leaders of 13 Asian nations recently agreed to pool part of their combined $2.7 Trillion in forex reserves to create a safety net of sorts, which would protect any and all of the member countries in the event of a currency crisis. The move stems from the 1997 Southeast Asian economic crisis, in which several Asian economies summarily devalued their currencies and were forced to enter into burdensome agreements with the International Monetary Fund. The bloc also announced that it would continue preliminary discussions over the possibility of a common Asian currency. However, this is probably still at least a decade from coming to fruition. Xinhua reports:

“A relatively modest proposal for a currency index comprising a weighted basket of regional currencies has been bogged down in wrangling.” Officials from the ADB now agree the proposal of a single currency is "many decades from being viable."