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.
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.
And if they buy things, that's bad for us? Why?
They can also flood the market and send the dollar spiraling downward should we ever piss them off, or if they find it in their strategic interests.
Flood the market? How many dollars do they get each year? $200 billion? Our GDP is over $12 trillion. Do you realize how big the currency market is? Spiraling down?
And if they were successful, and the dollar did spiral down, what have they accomplished? We'll import less, especially from them and we'll export more. That'll hurt us or them?
We have become dependent on a Communist country for our manufactured goods,
Dependent? How much do they sell us? How much do we make ourselves?
In terms of what? If Russia, Red China and Europe succeed in diminishing the US in world affairs, it will be an unmitigated disaster both for the US and all freedom-loving people everywhere (especially Israel).
Russia is the answer. They produce gold, oil & gas and have large currency reserves due to high energy prices. No other nation fits the bill
Russia
==And if they were successful, and the dollar did spiral down, what have they accomplished? We'll import less, especially from them and we'll export more. That'll hurt us or them?
If news reports are correct, Red China currently holds about 1/12 of our GDP in currency reserves. That's huge. If they ever decided to dump those dollars (or even seriously threatened to) it could start a wave of selling that could very well prove devastating to the USD (the effects of which would be felt around the world). Red China can also use its reserves to buy raw materials, oil, technology, build its military, or fund revolution abroad.
Russia would benefit from gold being re-elevated to a reserve currency status. Russia would love to sink the dollar. They are not so much pro-Euro as anti USD. Elevating the Euro to a much broader role as reserve currency helps sink the USD
How large is the currency market? How many dollars are bought/sold each day?
If they ever decided to dump those dollars (or even seriously threatened to) it could start a wave of selling that could very well prove devastating to the USD (the effects of which would be felt around the world).
And what happens when the dollar is devastated?
Red China can also use its reserves to buy raw materials, oil, technology, build its military, or fund revolution abroad.
Which is different than sending the dollar spiraling down.
I hope you're not holding your breathe waiting for that to happen.
Elevating the Euro to a much broader role as reserve currency helps sink the USD
You still haven't explained how that helps Russia.
LOL Why don't you run along and ask Vlad Putin why that helps Russia
We are like the football team that runs the score up to 60-3 by half time. Then slacks off to be fair, so the other team can try to even up the score, so it doesn't lose so lopsidedly
What does one accomplish by causing a serious disruption to the enemy? If dollar spirals down, then oil is going up, for starters.
I understand now. China is going to hurt the dollar, making their exports less competitive and making their oil imports more expensive all to help Putin.
Why didn't I see it earlier? You're a prophet!
Over $75k in anual earnings IS middle class. At least here in Washington it is. It is probably lower middle class in California.
$75k is not much.
This moron thinks that's a bad thing? And you agree? LOL!
With all due respect, I think that, in your zealous (jealous?) rush to dump on the American economy, you forgot that your "gold-bug" avatar would actually WELCOME a collapse of the dollar. Ooooops...
So I conclude that you have "out-smarted" (out-stupided?) yourself on this thread.
By the way, it IS nice to see that Business Week has finally begun to notice the workings of the "Invisible Hand". Do you think they've hired an economist?
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