Do China and oil exporters influence major currency configurations?

Abstract

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China's Dominance Hypothesis and the Emergence of a Tri-polar Global Currency System

“…It is, in particular, advanced country currencies, and foremost the euro and currencies that are managed vis-a-vis the euro, which are influenced by changes to the RMB regime. This finding is consistent with an earlier study (Fratzscher and Mehl, 2009)which focused, however, on the US dollar, euro and yen onlythat had shown that expectations of a weakening of the RMB peg to the US dollar trigger a re-balancing of portfolios into other reserve currencies, such as the euro. As a consequence, the largest effect of those statements is found for currencies that rely on the euro as an anchor, possibly due to market expectations of diversification of China's reserves out of the US dollar into the euro, along with that of a possibly declining dominance of the US currency in the international monetary system.…”

“…We found that the parameter estimates doubled from −0.10 before 2005 to almost −0.20 after 2005. In other words, a statement pointing to relaxation of China's peg to the US dollar or to diversification of China's reserves away from the US dollar leads to an appreciation of emerging Asian currencies of 0.2% on average vis‐à‐vis the US dollar, on the day the statement occurs (a magnitude comparable with that found by Fratzscher and Mehl () for the euro and the yen against the dollar).…”

“…First, market participants might interpret official 14 Our earlier research suggests that statements by Chinese authorities should be taken seriously indeed. In a previous study (Fratzscher and Mehl, 2009), which had focused on their impact on the US dollar, euro and yen, we had found that, on average, statements by emerging market authorities led to an appreciation of 0.25% of the euro against the US dollar and of 0.15% of the yen against the US dollar on the day they occur. This is in fact fairly large: about half the estimated average impact of the ECB President's exchange rate statements on the US$/EUR (Fratzscher, 2008a) and about the same as the estimated average impact of Japan's Minister of Finance's statements on the JPY/US$.…”

“…To take the model to the data, we compile a novel database of official statements by Chinese authorities on exchange rate and reserve policy, which builds partly on the database used in Fratzscher and Mehl (). We collect statements by the PBC Governor, People's Republic President and Premier as well as by other PBC officials, including the Head of the State Administration of Foreign Exchange (SAFE) and other Chinese officials who have occasionally – albeit more rarely – expressed public views on the renminbi and/or on the composition of China's reserves…”

“…However, several arguments suggest that endogeneity may not be a major concern in our context for four reasons. First, the use of such statements as shocks that allow the origin of co-movements to be identified is not specific to our context but fairly customary in the literature on monetary policy and exchange rate communication Fratzscher, 2007, 2009;Gosselin et al, 2007;Blinder et al, 2008;Fratzscher and Mehl, 2009). Second, the content and timing of most of the statements we use, such as speeches, testimonies and interviews to the press given through written procedure, are in practice decided well ahead of the day when they are made public.…”