How does currencies, gold, and international trade affect your finances? By Ken Mahoney

What is the G-20? What is a currency war? And what does any of this have to do with my money? If you’ve been asking yourself these questions, you’re not alone. The relationships that exist between global currencies and the officials who control monetary policy have been a regular feature in recent headlines. Why?

Currency values affect international trade. When the value of a nation’s currency is low, it encourages countries with higher valued currency to spend money there because their exports are “cheaper” so to speak. When the value of a nation’s currency is high, its exports become “more expensive”, and nations with lower valued currency are discouraged from purchasing goods and services produced there. While recovering from a global recession that brought high levels of debt and unemployment, it’s no wonder countries would want an advantage when peddling their wares abroad. This scenario explains why there has been a measure of tension between the U.S. and China in recent weeks.

China’s currency (the Yuan) is widely seen as being at least 20% artificially undervalued, which has driven up Chinese exports, but has also amassed a U.S. trade deficit with China of $227 billion in the last year alone. Ripple effects of this trade deficit are being felt throughout the U.S. political system. In Congress, the House of Representatives has already passed a bill that would give the administration power to penalize countries judged to be manipulating their currency values to gain a competitive edge in international trade.

On Saturday, the Group of Twenty (G-20) Finance Ministers and Central Bank Governors met in Gyeongju, South Korea to pursue an end to battles over currencies, with the goal of maintaining trade balances. At this meeting, the world’s currency keepers agreed to "be vigilant against excess volatility and disorderly movement in exchange rates" and China agreed to "move towards more market-determined exchange-rate systems that reflect underlying fundamentals." Although the language is not strong enough to impose strict guidelines on anyone, the G-20 agreed to adopt "indicative guidelines," an intentionally vague phrase that is yet to be clarified.

So how does all of this relate back to the average American investor? First, it is a reminder that taking a global approach to investing is prudent. Because currency values – like many other factors – commonly affect a country’s economic stability, it is better to avoid keeping all your proverbial eggs in one basket. Second, it can help you keep the right perspective when the dollar falls in value. Although a severely undervalued dollar would be bad, a slightly undervalued dollar can invite foreign money into our economy, boost domestic manufacturing, and create jobs.

ECONOMIC CALENDAR:
Monday – Existing Home Sales
Tuesday – Consumer Confidence, S&P Case-Shiller HPI (Home Price Index)
Wednesday – Durable Goods Orders, New Home Sales, EIA Petroleum Status Report
Thursday – Jobless Claims, EIA Natural Gas Report
Friday – GDP, Employment Cost Index, Chicago PMI, Consumer Sentiment

Data as of 10/22/2010 1-Week Y-T-D 1-Year 5-Year 10-Year
Standard & Poor's 500 0.59 6.10 8.25 0.06 -1.53
Dow 0.63 6.76 10.4 1.80 0.89
NASDAQ 0.43 9.27 14.5 3.81 -2.88
MSCI EAFE -0.42 2.72 1.44 1.10 1.03
10-year Treasury Note (Yield Only) 2.58 3.84 3.42 4.39 5.64

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. NA means not available.

HEADLINES:

Since August 27, when Federal Reserve Chairman Ben Bernanke signaled the central bank was likely to pump more dollars into the economy, the greenback’s value has fallen about 4.8% against the currencies of U.S. trading partners (data through October 15). Given the historical behavior of U.S. exports and imports, a sustained move of that magnitude should shrink the U.S. trade deficit by nearly $140 billion over the next two years. That’s the equivalent of an added 0.5 percentage point of economic growth in each year.

The Bureau of Labor Statistics has released data on regional and state unemployment for September. “Twenty-three states and the District of Columbia recorded unemployment rate decreases, 11 states registered rate increases, and 16 states had no rate change", the U.S. Bureau of Labor Statistics said as it compared numbers to August figures.

U.S. Treasury Secretary Timothy Geithner met China's Vice-Premier Wang Qishan on Sunday and "exchanged views" about economic relations between their countries, both sides said.

The simple credit card is on its way toward a makeover. The familiar plastic cards may one day be overtaken by credit-transactions over cell phones. Next month, Citibank will begin testing a card that has two buttons and tiny lights that allow users to choose at the register whether they want to pay with rewards points or credit, at most any merchant they please.