BoNY sees RMB/USD rate at 7.4 by end 2007

Senior currency strategist Michael Woolfolk believes China is becoming more flexible, while the yen is also poised to strengthen against the greenback.
According to Michael Woolfolk, senior currency strategist at the Bank of New York in New York, the renminbi will appreciate to 7.4 to the US dollar by the end of 2007. He expects the US dollar will continue its moderate decline, helped by an increasingly liberal policy the PeopleÆs Bank of China (PBoC).

ôThe broader currency trend in 2007 will be dollar weakness, but a modest weakness,ö says Woolfolk during a trip to Hong Kong. ôOn the other side, what weÆre seeing is a more US-friendly and accommodating central bank in China.ö

This rationale has been buoyed by comments yesterday by Zhou Xiaochuan, regarding next weekÆs visit to China by Henry Paulson, US treasury secretary and Ben Bernanke, chairman of the US Federal Reserve. According to Zhou, the Chinese government will ôrespond positively and activelyö during the visit next week and the countryÆs currency regulator is keen improving management of capital flows so that it can let the market set the renminbiÆs exchange rate.

ôWhat weÆre hearing from the PBoC is that [China] is looking to enhance the strategic relationship with the US, that they are setting targets for economic growth and looking very closely at the balance of international payments,ö says Woolfolk.

Although a move from the yesterdayÆs USD/RMB exchange rate of 7.835 to BoNYÆs 2007 projected 7.4 would likely satisfy many in the US, quick liberalisation of the Chinese currency could have regional impacts, notably on the yen/renminbi cross, which may impact the regional balance of economic power.

ôChinaÆs current currency policy is not a major problem other countries like it is for the US,ö he says. ôThe Chinese authorities have been rightly conservative. Some of the clients we talk to in Asia are concerned that the exchange rate might become a struggle between the US and China, but we see this as unlikely. We see the RMB at 7.4 as a fair and workable rate.ö

Woolfolk expects that a weaker US dollar will have an effect on other global currencies. The bank has the house view that the euro will widen to 1.36 dollars by the end of the year, while the yen/dollar rate will be at 107. Over the course of next year, however, the yen should strengthen.

ôWe see the Yen returning to its fair value in the coming 12 to 18 months, as interest rates will normalize,ö says Woolfolk. ôWe see ourselves as more hawkish than other banks regarding Japanese monetary policy, and expect the Bank of Japan to move interest rates by 100-200 basis points. With our view of a weaker US dollar and more normalised interest rates in Japan, a dollar/yen exchange rate of 100 will happen in the not too distant future.ö

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