A big appreciation in the euro is not on the cards.

The implication of the two is an explosion upward for the Euro.

While it may seem hard to imagine that the speculative tide might ever turn against China, exchange rate pressures can turn in an instant.

It is a lot easier to exit from a fixed exchange rate regime when the pressures on the currency are upwards.

Real appreciation of the renminbi is necessary for a balanced world economic recovery.

The stronger euro and weaker dollar in 2004 limited price appreciation in Europe for pulp and paper commodities.

Japan might get some growth, probably not even a full percentage point of GDP.

The implication, of course, is a huge appreciation of the euro against everybody else.

The increase in the exchange value of the euro from 2003 to 2004 eroded production cost advantages and the benefits of dollar denominated price increases.

During April, the rise in inflationary expectations and the euro s appreciation occurred more or less concurrently.

The second transformation is the substantial appreciation of the renminbi that seems inevitable in the coming years.

There is some risk that appreciation of the exchange rate if greater flexibility were allowed could precipitate deflation.

To allay pressure on the domestic money supply 26 and forestall an appreciation of the exchange rate, the Chilean Government has adopted since 1992 measures to slow down the inflow of short term capital.

This includes such factors as home market growth constraints, liberalization and currency appreciation.

China is fiercely resisting US and European pressure to accelerate the snail paced appreciation of the renminbi against the dollar.

For two decades, expectations that an appreciating yen would restore external balance were repeatedly disappointed. At the time of the December 1971 Smithsonian Agreement, 308 yen to the dollar was supposed to do the trick.

Today, given the importance of exports to China s economy, its government is reluctant to permit a major revaluation, despite strong pressure by foreign governments to allow the renminbi to appreciate in line with the country s huge trade surplus.

On the other hand, any good news is immediately followed by currency appreciation, making the task of remaining competitive that much harder.

For two decades, expectations that an appreciating yen would restore external balance were repeatedly disappointed.

But Chinese officials know that renminbi appreciation is also in China s interest, as they seek to dampen inflationary pressures.

Farm.

Other downside risks include adverse spillover effects on fixed investments originating from any unexpectedly strong rise in long term interest rates in the US and a further strong appreciation of the euro.

Given rapid economic growth and continuous renminbi appreciation, Chinese GDP could exceed that of the US as soon as 2015.

From the mid 1990s until very recently, the dollar strengthened sharply against European currencies.

Thus, the enormous strength of the dollar in recent years implied an eventual reversal. That reversal is now underway.

But what would an appreciation of the renminbi do to China s inward and outward foreign direct investment (FDI)?

This problem is exacerbated by the fact that the world s biggest exporter, China, is aggressively intervening to minimize any appreciation of the renminbi.

The euro s recent sharp rise has made this competitiveness problem even more severe, reducing growth further and making fiscal imbalances even larger.

In Europe, the appreciation of the euro and other currencies against the dollar mitigated the potential adverse impact of higher oil prices.

The estimated decreased requirement of 33.9 million in respect of exchange rate fluctuations reflects the recent strengthening of the United States dollar after a period of weakening against a number of currencies.

Higher international interest rates and a repeated lowering of the exchange rate made servicing the external debt more costly in terms of the national currency.

But knee jerk reaction to stifle the exchange rate appreciation that should follow from strong productivity growth only stokes more inflows.

In the United States, a decline in the exchange value of the US dollar in 2003 to 2004, as well as labour productivity gains, helped restore industry competitiveness and profitability.

In particular, the appreciation of the euro against the United States dollar from 1.076 in March 2003, when the budget proposals for 2004 were prepared, to 1.326 in December 2004 has resulted in a level of expenditure with respect to staff costs that exceeds substantially the level of appropriations made in the budget 2004.

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But such an insignificant rate hike will do little to relieve long term pressures, because investors will expect more rate hikes and move money into China, increasing upward pressure on the yuan s exchange rate.

Experts estimate that, in terms of guarding against inflation, the euro s appreciation has been equivalent to about 35 basis points rise in the interest rate.

But if high interest rates are causing the Euro's rise, why was the dollar appreciating in periods when the US Federal Reserve cut rates aggressively?

But expanding demand and allowing real effective exchange rate appreciation in China will not be enough if other countries do not do their part.

But when a currency s appreciation is triggered by capital inflows that represent the asset diversification preferences of advanced economy investors, it can and should be resisted.

So it announced that it would sell 7 billion from its reserves to boost the ruble a move that caused the exchange rate to overshoot on the upside.

But this can and should be addressed by domestic policies aimed at bringing about structural change, not by external policies like exchange rate appreciation.

Without domestic structural change, currency appreciation would not only undermine exports, but might also decrease imports, owing to higher unemployment and lower income.