All eyes on China as weak dollar causes difficulties

There are increasing signs that the weak dollar is causing problems for the rest of the world, particularly emerging market economies, while the Chinese could be preparing to adjust the dollar-pegged renminbi to allow it to appreciate.

Over the past two months, central banks across the globe, including Thailand, South Korea, Russia and the Philippines, have spent as much as $150bn on currency intervention in an effort to stem the dollar's decline in value and protect the value of exports.

Emerging market economies, which are certain to be frontrunners of any global recovery, are concerned the weak dollar will hurt their fledgling recoveries while protecting China because the undervalued currency is tied to the dollar.

"Quite clearly, all Asian central banks have found it necessary to intervene, and it's costing us," Korn Chatikavanij, Thailand's finance minister, told Dow Jones. The only other option for rapidly recovering emerging market nations to control currency appreciation are cumbersome foreign capital inflow restrictions.

In Brazil, one of the last into and first out of recession, the government has signalled the real is too strong against the dollar. And while the Obama administration speaks of a strong commitment to a strong dollar it has done little, like the administration before it, to arrest the slide in the greenback.

So it's all eyes on the Chinese. Will Beijing, as the IMF urges, decouple from the dollar enough to allow its currency to reflect its true strength?

Yesterday, the People's Bank of China said foreign exchange policy would take into account "capital flows and major currency movements", a pointed reference to the large speculative inflows of capital that China is receiving and US dollar weakness.

This is a rare correction to the official language but economists say the wording does not necessarily mean Beijing will shift policy soon - it is merely a signal of future flexibility.

If change is coming, Beijing is not going to tip anyone off, predicts Jim O'Neill, Goldman Sachs' head of global economic research. "It's one thing for the Chinese to ignore the US and Europe. But when they start ignoring the developing G20 it's a bit trickier." ·