The Business Insider website ran a story about a currency manipulator that is bigger than China. They are referring to Israel whose holdings of foreign currency is 61% of GDP compared to 45% in China. The chart below shows the Bank of Israel’s (BoI) foreign currency reserves, which have ballooned since early 2008 when the central bank began buying up dollars and selling shekels. By selling shekels and buying US dollars the Bank of Israel hopes to make its exports more competitive by maintaining a weaker currency. March 2008 was he first time since 1997 that the Bank intervened in the foreign exchange market. However markets are of the opinion that the BoI run a dirty float policy on the exchange rate and speculate as to what its intervention price is. Some suggest that the price that they are aiming for is approximately 3.8 shekels per dollar.
Although this is an interesting article I do wonder how a small economy like Israel’s can be of any serious threat to the US manufacturing sector. Also I would suggest that reserves of 61% of GDP in Israel is a lot smaller than 45% of GDP in China. The actual figures are below:
China: $7.26 trillion 45% = $3.27 trillion
Israel: $245.95bn 61% = $1.65bn
However, all this accusation of the US calling China a currency manipulator is interesting when you consider other countries e.g. Israel and Switzerland are doing something similar. For the US, having a trade deficit is a function of it simply consuming beyond its means. The exchange rate matters with which country you incur the trade deficit with. If China’s goods became more expensive (with the Yuan allowed to appreciate) the US would probably keep on borrowing more money. From a Chinese perspective why should it have to stop fixing its exchange rate to the US$ when the US keeps on borrowing money and getting into further debt.