This can't go on forever:
Posted on 11/26/2006 8:04:47 AM PST by GodGunsGuts
China Raises Red Flag On Dollar
Parmy Olson
11.24.06
Americans may be spending their dollars with merry abandon as the Christmas shopping season begins this Black Friday, and that might be a good short-term strategy: the greenback slid on the foreign exchange markets after a Chinese central banker expressed fears about depreciation of the U.S. currency.
“The exchange rate of the U.S. dollar, which is the major reserve currency, is going lower, increasing the depreciation risk for East Asian reserve assets," wrote Wu Xiaoling, deputy governor of the People’s Bank of China, in an academic paper. Wu is ranked by Forbes as the 35th-most-powerful woman in the world.
As New York trading wound down, the euro cost $1.3096, up from a $1.2951 close in London on Thursday. American markets were shut on Thursday for the Thanksgiving holiday. The British pound rose to $1.9323 from $1.9156. The dollar also fell to 115.79 yen from 116.14 and to 1.2091 Swiss francs from 1.2234.
Underscoring the potential for U.S. inflation in a depreciating dollar, an ounce of gold cost $645.50, up from $630.80 on Thursday.
Gold miners followed the metal higher: Newmont Mining rose 1.5%, or 67 cents, to $45.55, while Goldcorp jumped 3.0%, or 81 cents, to $28.19. South Africa's AngloGold Ashanti surged 3.4%, or $1.54, to $46.65.
The stock market dropped, with the Dow Jones industrial average and Standard & Poor’s 500 each losing about 0.4%, in part reflecting worries that foreigners would avoid dollar-based assets. Yet Treasury bonds rose as some of that money found its way into the credit markets, making their yields even less attractive to foreign investors. The benchmark ten-year note saw its return decline to 4.54% from 4.57% as the price rose $1.87 for each $1,000 of face value. European government bonds also were higher.
Wu’s comments marked the second time this month that a Chinese central banker had made dollar-wary comments. On Nov. 9, the central bank governor, Zhou Xiaochuan, was quoted as saying that China has plans to diversify its assets into “many instruments,” presumably moving away from the dollar.
China has never revealed the exact composition of its foreign currency reserves, but market speculation suggests at least 70% is in dollars. With Chinese reserves having recently topped $1 trillion, a move away from the dollar could have significant implications.
For months China has been soaking up U.S. Treasury bonds, using dollars from its huge trade surplus with the United States. Wu noted that East Asian investors not only face a currency depreciation risk from holding dollar-denominated assets but also falling interest rates on long-term bonds. There is some perhaps unintentional irony in that comment because China’s seemingly insatiable appetite for Treasuries seems to be a major cause of the falling interest rates.
Another cause is an expected slowdown in U.S. economic growth. Earlier this week, the United States cut its forecast for 2007 economic growth to 2.9%, down from an earlier forecast of 3.1%. (See “ White House Cuts Growth Outlook”) The yuan, whose fluctuations are restricted by the Chinese government, hit a record on Friday. The dollar fell to 7.8526 yuan, the first time it traded below 7.86. The Chinese currency has appreciated by 3.3% against the greenback since Beijing allowed a limited float last year.
Standard & Poor's said in a research note that it expects the euro to reach $1.32 by the end of the year.
Shu-Ching Jean Chen in Hong Kong contributed to this article.
ping
More:
US dollar 'will keep falling'
Heather Stewart
Sunday November 26, 2006
The Observer
The US dollar has reached a 'tipping point' as foreign exchange markets wake up to the threat that the Federal Reserve will have to slash interest rates in the new year to stave off recession, analysts say. After a sharp sell-off on Friday took the greenback to 18-month lows against the euro, and pushed the pound to $1.93, economists warned that there was worse to come for the US currency.
'We are just at the start of what we think will be a downtrend for the dollar - a tipping-point has probably been reached,' said Tim Fox, currency strategist at Dresdner Kleinwort Wasserstein, who expects sterling to hit $2 within the next three months.
The euro has been the main beneficiary. The European Central Bank is expected to continue raising interest rates into next year amid strong growth in the eurozone economies, while the Fed has left rates unchanged at 5.25 per cent since June.
'Steadily, the US dollar will decline through 2007, but probably at a faster pace in the second half of the year, as people realise the Fed is going to have to cut rates,' said Paul Mackel, currency strategist at HSBC.
Senators on Capitol Hill would like to see China allow its currency, the renminbi, to appreciate further against the dollar, making Chinese imports more expensive; but the chances are low.
http://observer.guardian.co.uk/business/story/0,,1956925,00.html
Hmmm...where is George Soros right now?
How long before our illegals demand payment in gold?
the dollar could stand to go lower for a bit and it won't be the end of the world when it does. so insulate yourself from the doomsday headlines (and posts) now, or be more miserable for the next two years than you need be.
What does this have to do with racist comics?
When the dollar goes into a recession the world is in for a recession. Those who have fought hard to ruin the dollar should remember that.
I'm completely insulated from "doomsday" headlines as I am completely positioned to profit from the dollar's inevitable decline.
LOL
The world is not nearly as dependent on the dollar as in times past. We have shipped our manufacturing jobs overseas, thus creating a massive trade deficit. And our Congress routinely spends more money than they take in, thus creating the budget deficit. These both put downward pressure on the dollar, and will continue to do so until we take active measures to rectify the situation. Solution: bring our manufacturing jobs back from Red China, cut taxes --and-- spending even more.
True but only half the story. The "significant implications" apply even if China, Canada, et al simply don't buy as many T-bonds as they had been in the past. They don't have to sell T-bonds, or buy gold or Euros instead of dollars, for the poop to start hitting the fan.
You nailed it. Selling dollar holdings is a worst case scenario. But not buying US debt instruments would itself send the dollar into a tailspin.
PS Red China is also part of a global movement--to include Russia, Iran, Venezuela, etc--that are all exploring way to diversify out of the USD for the purposes of diminishing the USA in global affairs. They call it creating a "multipolar" world.
This is rich coming from a country that 'pegs' its currency to the dollar rather than letting it 'float' on the world currency markets.
Cheaper dollar (1) = US exports less expensive when sold around the world (US exports more)
Cheaper dollar (2) - imports to the US become more expensive, and thus domestic made goods can compete better against imports. (US imports less)
Cheaper dollar (3) - due to (1) and (2) U.S. trade deficit begins to decline.
Cheaper dollar (4) - after (3) continues for a perriod of time, it brings the dollar into equilibrium with its exports and imports and then,
Cheaper dollar (5) - dollar begins to gain in value.
Why do you think the IMF and World Bank so often advise "developing nations" struggling to control their balance or payments problems to devalue their currency? Because they have set their currency at artificial fixed rates that no longer reflect the world market value of their world trade. And the corrective, a lower currency, does what? Lowers imports, increases exports and increases domestic production, which starts to put the people back to work.
Since our dollar floats and is not fixed, world currency markets are constantly adjusting the trade-weighted value of the dollar. The "cheaper" issue is never a long-term issue, because the temporarily cheaper dollar produces conditions that lead, over time, to a corrective balance, eventual stability and a position from which renewed growth and increased dollar value can be obtained.
The only long term way that Americans can avoid this from constantly recurring is for Americans to spend less (buy fewer imported comsumer goods) and save more (more American money goes into investments, here and abroad).
Foreigners really won't like that solution very much. Without the spending of the American consumer, many nations GDP would decline.
This can't go on forever:
If they are that nervous about it, decouple the renmembi/yuan fixed ratio from the dollar and see what happens.
The real story is the ECB is continuing to raise rates when the shouldn't.
If the dollar goes lower dont our exports stand to rise?
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