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Dollar Drops as China to Diversify Holdings
MoneyNews ^ | November 10, 2006

Posted on 11/10/2006 8:33:03 AM PST by GodGunsGuts

Dollar Drops as China to Diversify Holdings

MoneyNews Friday, Nov. 10, 2006

LONDON -- The dollar sank to a two-month low on Friday after further comments from China's central bank governor Zhou Xiaochuan on the bank's plans to diversify its $1 trillion in currency reserves, while European and Asia shares fell amid soft economic data.

Already under pressure after a weak reading of U.S. consumer sentiment, the dollar extended Thursday's losses after Zhou said China had a clear plan to diversify its FX reserves.

Zhou, speaking at a meeting of central bankers in Frankfurt, said diversification would include different currencies and investment instruments. Although Zhou said there was no change to China's long-standing diversification policy, many traders took his comments to mean China might buy fewer dollars as the country's massive current account surpluses swells its coffers.

"Undoubtedly, the dollar has weakened on the comments. But on the basis of the comments in and of themselves, I wouldn't expect the dollar to continue weakening," said Todd Elmer, currency strategist at Citigroup.

"I'd expect the trend of reserve diversification to be unfavourable for the dollar over time, but we have to be cautious. I'm not sure this rhetoric means you should chase the dollar weakness, but I wouldn't expect significant dollar rebound in the near term," Elmer said, citing interest rate differentials in the coming weeks that are unlikely to be dollar-positive.

The dollar hit its lowest level in more than two months against a basket of major currencies and touched a 2-1/2 month low against the euro at $1.29 per euro.

The dollar and other currencies also came under pressure against the yen overnight after Bank of Japan Governor Toshihiko Fukui said he was concerned about a sharp unwinding of carry trades in which investors borrow the low-yielding Japanese currency and buy higher yielding currencies.

The dollar was buying 117.35 yen.

SHARES DIP

The FTSEurofirst 300 was down 0.1 percent at 1,465.3 points, off Thursday's 5-1/2 year high as weakness in pharmaceutical stocks in particular weighed.

Concerns that drug companies may eventually face price controls from the U.S. government have arisen since Democrats won both the House of Representatives and the Senate in U.S. mid-term elections.

"The view is that for the next little while, that will be a headwind to drug companies in the U.S. It's a sentiment thing," said Stephen Dowds, head of international equities at Northern Trust.

AstraZeneca was down 2.2 percent and rival GlaxoSmithKline fell 1.7 percent.

However, equity markets overall looked attractive, with solid growth and reasonable company earnings, Dowds said.

"Corporate balance sheets are very strong, people are looking for growth and there's a lot of cash sitting on the sidelines in either private equity hands or even in quoted companies' balance sheets."

Data showing the French economy unexpectedly stagnated in the third quarter did equities few favours, while weaker-than-expected machinery orders in Japan helped push the Nikkei to a one-month closing low of 16,112.4 points.

EURO ZONE BONDS FIRM

The prospect of China diversifying further out of dollar denominated assets proved a boost for European government bonds on hopes they might attract more Chinese buying, but analysts noted it was a gradual process.

"It's been an issue for months. We are certainly seeing some diversification into euro zone bonds, but I don't think it's on as big a scale as many people think," said ING's Padhraic Garvey.

The December Bund future rallied to test key resistance at 118.00, up 18 ticks, while the 10-year note was yielding 3.718 percent.

Gold edged up as the dollar weakened and as investors speculated China would diversify into bullion or other commodities.

Zhou said diversification included currencies and investment instruments including emerging markets but asked if this included gold, he said: "That's a separate thing."

Spot gold was trading around $634 an ounce, having touched a two-month peak around $636.50.

Oil prices retreated, giving up most of Thursday's gains as traders booked profits. The International Energy Agency (IEA) noted that inventories in OECD nations had risen at a rate of 1.15 million barrels per day during the third-quarter, the highest third-quarter build in 15 years, but also predicted a jump in demand during the current quarter.

U.S. light crude was down 72 cents at $60.44 a barrel.


TOPICS: Business/Economy; Extended News; Foreign Affairs
KEYWORDS: china; diversification; dollar; economy
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Watch many other countries follow suit.
1 posted on 11/10/2006 8:33:06 AM PST by GodGunsGuts
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To: GodGunsGuts

--b--


2 posted on 11/10/2006 8:37:34 AM PST by rellimpank (-don't believe anything the MSM states about firearms or explosives--NRA Benefactor)
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To: GodGunsGuts

Tin-foil hat scare tactics-Just monday the conservative
talk show bloviators said the economy was chugging right along, now this is worldwide confidence eroding in our Quasi-french we cant surrender fast enough gubbermint?


3 posted on 11/10/2006 8:38:36 AM PST by claptrap (optional tag-line under reconsideration)
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To: GodGunsGuts

chicoms will now be pressured to stop holding down the value of their currency. WalMart will reduce purchases as other Nations goods will become cheaper etc.

LLS


4 posted on 11/10/2006 8:40:27 AM PST by LibLieSlayer (Preserve America... kill terrorists... destroy dims!)
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To: GodGunsGuts
Not only have we allowed the Chinese to start building lots of essential stuff for us, but we've also allowed them to lend us the money to buy the essential stuff they build for us.

When they decide the bill is due and payable, ...

5 posted on 11/10/2006 8:41:29 AM PST by snarks_when_bored
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To: GodGunsGuts
"I'd expect the trend of reserve diversification to be unfavourable for the dollar over time, but we have to be cautious. I'm not sure this rhetoric means you should chase the dollar weakness, but I wouldn't expect significant dollar rebound in the near term," Elmer said.

This is perhaps the most mealy-mouthed, non-committal, all-bases-covered financial quote I've read in a while, and that's saying something. Does it have any content or meaning whatsoever?

6 posted on 11/10/2006 8:42:44 AM PST by jiggyboy (Ten per cent of poll respondents are either lying or insane)
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To: GodGunsGuts
and gas prices went up immediatly after the election
7 posted on 11/10/2006 8:43:54 AM PST by KTM rider ( "It's time for conservites to take back the republican party" Goldwater64)
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To: claptrap
The Democrats were still the minority party on Monday. Other nations know exactly what to expect of Democrats and they are posturing in anticipation.
8 posted on 11/10/2006 8:43:59 AM PST by Myrddin
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To: LibLieSlayer
Chicoms will now be pressured to stop holding down the value of their currency.

Actually, they'll HAVE to stop "holding down" the value of their currency if they expect to buy currencies other than the U.S. dollar.

9 posted on 11/10/2006 8:46:01 AM PST by Alberta's Child (Can money pay for all the days I lived awake but half asleep?)
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To: Alberta's Child

Absolutely and it will destroy the cheap advantage that they have enjoyed.

LLS


10 posted on 11/10/2006 8:58:25 AM PST by LibLieSlayer (Preserve America... kill terrorists... destroy dims!)
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To: GodGunsGuts

Thank God with your folks now in power the "housing bubble bursting" will go away--Houdini-style.


11 posted on 11/10/2006 9:00:35 AM PST by 100-Fold_Return (In Prisons Tattletales Are the Same as Child-Molesters...hmm)
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To: GodGunsGuts

Uh oh, this isn't good.


12 posted on 11/10/2006 9:01:37 AM PST by durasell (!)
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To: GodGunsGuts

This is not new news as they have been jawboning about this for months for it would take some time to implement such a plan and the Chinese do nothing in short order (central planning mentality).

The threat is not the diversification away from USD as markets will adjust if economic conditions warrant.

The real threat is if and when they decide to bail on US Bonds, of which they are the second largest holder behind Japan. This would cause havoc in all markets.

When they do, you know they're getting ready to move on Taiwan.


13 posted on 11/10/2006 9:05:49 AM PST by Reagan Disciple (Peace through Strength)
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To: GodGunsGuts

Didn't take long for the Chinese to tell the new Congress what to do.


14 posted on 11/10/2006 9:08:50 AM PST by glorgau
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To: Reagan Disciple
When they do, you know they're getting ready to move on Taiwan.

They haven't got the military wherewithal to prevail. Political is a whole 'nother story.

15 posted on 11/10/2006 9:11:26 AM PST by glorgau
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To: glorgau

Not sure why you would say that considering they have been purchasing SU-24/25/27s and TU-22s from Russia with Air-to-Sea missle systems for years.

Couple this with the expansion of PLA Navy and the rocket technology that they stole from us and have bought from the Russians and you have the makings of a formidable force that,

1) the Japanese cannot current counter
2) the Taiwanese cannot stop
3) the US would not engage if any Democrat gets the WH in 2008.

I understand the 3rd/7th Fleets would put an end to this fairly quickly, but considering we promote the "One China" policy in the UN and despite the 1979 Taiwan Defense Act, no way we would move unless China turned her sites on Japan.


16 posted on 11/10/2006 9:21:11 AM PST by Reagan Disciple (Peace through Strength)
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To: GodGunsGuts

Let "diversify" our accounts with China with some tarrifs to price China out of our market.

Bastards.


17 posted on 11/10/2006 9:22:19 AM PST by Finalapproach29er (Dems will impeach Bush if given a chance.)
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To: Reagan Disciple

Don't fret boys... the war will be happening right on schedule in 2008.


18 posted on 11/10/2006 9:31:56 AM PST by taxed2death (A few billion here, a few trillion there...we're all friends right?)
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To: GodGunsGuts

Everything is down. Even gold. Could be the start of a Democrat recession.


19 posted on 11/10/2006 9:33:38 AM PST by RightWhale (RTRA DLQS GSCW)
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To: Finalapproach29er

"Let "diversify" our accounts with China with some tarrifs to price China out of our market.

What do you think would be left on the shelves of Auto parts stores (Pep boys, Autozone), Home Depot, CompUSA, Walmarts, etc....?


20 posted on 11/10/2006 9:34:13 AM PST by taxed2death (A few billion here, a few trillion there...we're all friends right?)
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