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.
I have nothing against low prices. As I told Gslob, I am against trading with Communist countries on moral and national security grounds. We also can't compete with slave labor. Rather than containing Communist revolution/expansion, we are subsidizing it.
You pose some interesting arguments. I don't have the time to do the homework, though plenty has been written on the subject.
See, but here's the thing: In the world according to Todd everything is fine. Just humming along daddy.
However, in the real world, folks are really feeling the squeeze. Not vague anxiety due to media hype, but an actual in-the-bones fear of what the future may hold for them and their children.
This is the kind of fear that pols ignore at their peril.
...one more thing, there's a reason why a half-wit populist like Lou Dobbs has resonance for a lot of people -- because he's among the first guys to come along and say, "Hey, something is screwy here and it isn't your fault."
The next guy to come along won't be a halfwit. He'll be a guy who really targets those fears and he'll rip the system apart.
Where did I say that? I only asked for proof that jobs were actually lost. Can we improve the way things are humming along? Sure. EPI probably doesn't have the answers you'd like. Or that would work.
This is the kind of fear that pols ignore at their peril.
Obviously the only way for conservative politicians to survive is to act like liberals. How well did that work last week?
He speaks their language, half-wit
- because he's among the first guys to come along and say, "Hey, something is screwy here and it isn't your fault."
It isn't your fault. I heard that before somewhere.
The pols can't stop the outflow of jobs to China at this point anymore than they can stop the influx of illegals.
Let's be very clear here. These are large, very complex forces at work. The world is re-making itself and a lot of folks are going to get hurt. They'll grow old and bitter waiting for things to return to the way they "should be" or "used to be."
Am already doing it, but one person is a drop in a bucket.
I try to do it too, but it is getting increasingly difficult to NOT buy good made in Red China.
Which nation produces oil & gas, produces gold, has large foreign currency reserves.... AND would benefit most from USD being dislodged as the world's top reserve currency? With it being replaced by gold and the Euro.
Ever go into a Harbor Freight tools store?
Great links. Thank you.
What will "evil" China do?
FORECLOSE?
LOL!
With their hoard of T notes they could cause disruption. And evil they are without "".
When you said,
"We should not be sending wealth created in freedom to a Communist dictatorship no matter how tempting the returns."
you exposed your ignorance about the way our trade with China actually works:
(1) China sends us flip-flops.
(2) We pay with dollars.
(3) Some of those dollars (now owned by China) are invested in the US.
Can you explain how those actions "...send... wealth..." to China?
Didn't think so....
Well, you see, the Chinese manipulate their currency so that it's undervalued by 40%. So you should have said that they send us $10 worth of flip-flops and we pay them $6. Like most schemes used by Communists, this is the best way to accumulate wealth. Make stuff and sell it for a 40% discount.
The U.S.
Try again.
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