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.
PS the dollar broke down below .85 (a very important number)...but not without a fight. If the USD holds below .85 the next stop will be .80, a hugely important number. If the USD breaks below that, $1650 gold will be here in no time.
And piss off the Corporate elite? Perish the thought.
Yes.
What was the price of gold the last time the USD index was below 80?
The article talks about the dollar dropping today. Right Whale said gold was also dropping, today.
Why would the Chinese waste their precious foreign reserves on that barbaric relic?
Everyone knows that the North Koreans and others have been busy counterfeiting gold by the bushel basket!
The Chinese will sensibly keep their assets in greenbacks, and maybe add a little more Euros and yen, for the sake of diversication, always a wise plan with paper assets.
Nobody smart would want to own gold - ask the experts!
Their little nuggets of wisdom are sure to appear on this thread. I know I've learned a lot about why to not own gold right here on FR.
Today is not a good indicator as it is a holiday. Let's see what happens on Monday.
LOL! They're already here.
What have you learned?
And what was the price of gold at that point?
I'm not sure many people look at gold's performance over the past month when purchasing it, unless they are speculators.
Take a look for yourself. I posted the chart. But it's not about where gold was in 2005, it's all about the direction gold will go (and by how much) as the dollar index begins heading towards .80....and when the dollar breaks below that...look out below! (or above, in the case of gold).
I am both. I have been trading short term movements in gold for the last five years on margin. My retirement is currently invested in a gold fund.
Are you claiming it went up in 2005 as the dollar dropped toward .80? Did gold fall when the dollar then rose back to .85?
"Gold is also moving on rumors the Chinese government might increase its gold reserves to diversify its large holdings of U.S. securities and to hedge against a rising yuan/falling dollar.
This has been known for a little while now.
I've run it through my translator. It means:
My butt is covered no matter what happens...
What have you learned?
Is this just a mid-term quiz, professor? Will it count for the final mark?
I've learned from you lot that only the government is in a position to know what's best for the people, especially when it comes to issues that only experts understand. If the government says paper money is good and gold is bad, then paper money is good, and gold a mere delusion.
Have I got it right so far?
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