Dollar Drops as China to Diversify Holdings

MoneyNews ^ | November 10, 2006

[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.

[Toddsterpatriot]

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

They'll have to accept dollars. Or the things they can buy with dollars. And this will be bad how, exactly?

[Toddsterpatriot]

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.

Where did I say that?

If the government says paper money is good and gold is bad, then paper money is good, and gold a mere delusion.

Where did the government say that?

Have I got it right so far?

Not unless you have some links.

[expat_panama]

it's all about the direction gold will go (and by how much) as the dollar index begins heading towards .80...

As usual I'm beating my head against these numbers and I can't see it. 

The dollar index is doing the same thing that's it's been doing for a few years now-- hovering around 80. 

Gold is falling from the peak it hit earlier this year --a peak that it hadn't seen in decades.

For the life of me I just can't see why having the dollar/euro level going to what it was in '04, doesn't simply mean that gold isn't going to it's '04 level too --$400/oz.

[Toddsterpatriot]

For the life of me I just can't see why having the dollar/euro level going to what it was in '04, doesn't simply mean that gold isn't going to it's '04 level too --$400/oz.

Shhhh....the brokers at Monex need to pay for their Benzs.

[snarks_when_bored]

They'll have to accept dollars. Or the things they can buy with dollars. And this will be bad how, exactly?

How much financial pain is our populace willing to take? The recent election suggests an answer. The Chinese people are used to having nothing; if their government decided it was in the best interests of China to collapse the U.S. economy (and so the world economy), they could do it with the leverage we (and other Western nations) have given them. Who would cry "Uncle!" first? Uncle Sam? I would hope not, but I'm not certain of it.

[headsonpikes]

Leenks?!?!

I don't need no steenkin' leenks!

Your unreasoning antipathy to gold is evident on almost every patronizing post you make on this issue.

Money is good - thank God the government will create lots of it! And gold is good - it's all good!

[Toddsterpatriot]

How much financial pain is our populace willing to take? The recent election suggests an answer.

Not a lot, but this election wasn't about financial pain, unless having 4.4% unemployment causes you pain?

The Chinese people are used to having nothing; if their government decided it was in the best interests of China to collapse the U.S. economy

The Chi-Comms don't care about their people, that's true.

they could do it with the leverage we (and other Western nations)

You may be giving them more power than they really have. How could they collapse our economy? By not selling us stuff?

[MadIvan]

Give Taiwan the green light to develop nuclear weapons. They need it anyway to deal with North Korea.

Regards, Ivan

[Toddsterpatriot]

I don't need no steenkin' leenks!

Not if you're going to emotionally misrepresent what I've posted. Facts are hard, feelings are easy.

[snarks_when_bored]

...this election wasn't about financial pain...

Correct, but the analogy I was going for is easy to see.

You may be giving them more power than they really have. How could they collapse our economy? By not selling us stuff?

Maybe. But suppose they decided overnight not to buy any more U.S. debt? And suppose they twisted the arms of their neighbors and trading partners and Middle Easterners and Chavez and all of the rest not to buy any more U.S. debt? It might not collapse our economy, but interest rates would skyrocket, etc. Also, they could bring to a sudden halt every production line and supply chain in their country which sends goods to the West. That would bring enormous pressure to bear on our government from U.S. business interests to do what the Chinese want.

Scenarios of various sorts can be envisioned. Probably none of them will come to pass, but it's not impossible...

[Toddsterpatriot]

But suppose they decided overnight not to buy any more U.S. debt?

How much did they buy in the last 12 months?

It might not collapse our economy, but interest rates would skyrocket, etc

See, I can agree that rates would rise, skyrocket....probably not.

Also, they could bring to a sudden halt every production line and supply chain in their country which sends goods to the West.

When they do this are they trying to hurt us or themselves?

That would bring enormous pressure to bear on our government from U.S. business interests to do what the Chinese want.

The Chinese need their economy to grow 10% a year to keep their unemployed rural population from revolting. If they shut down their production, the Commies would be dead in months.

[snarks_when_bored]

I think we're talking past each other. I'm envisioning a war scenario, not just unusual business conditions. We've given China a lot of financial leverage over us in the last decade or so (I see that as of a few months ago, China held $260 billion in U.S. Treasuries...second only to Japan...not a gigantic amount, but still...).

Short of war, the Chinese will try not to do harm to themselves, their economy. In a war-like environment, all bets are off. I expect that after the 2008 Olympics, China is going to get much more belligerent with respect to Taiwan. We'll see what happens if they do...

[headsonpikes]

Not if you're going to emotionally misrepresent what I've posted. Facts are hard, feelings are easy.

Jeez, next you'll book yourself on Oprah!

The facts are that you lambaste, quite rightly, the snake-oil gold-bug predators; but in so doing, you sideswipe all legitimate actors in the precious metals business, and wallpaper over the inflationary behavior of the Fed.

Fine, I make money from inflation - that's how I've structured my portfolio.

I expect to see gold more or less double over the next 2-4 years, and my metals and energy stocks to quintuple or better over the same period.

One would be a fool to deliberately ignore the real-world consequences of government profligacy.

They may not publish M3 anymore, but it's growing at a 10% clip nonetheless.

FWIW, I own no bullion, only stocks - I'd prefer to buy gold in a few years at much higher levels, frankly, and only as a portion of my cash assets. I'm 95% equities and 5% cash now, and that cash is C$.

[Toddsterpatriot]

I'm envisioning a war scenario, not just unusual business conditions.

In a war scenario their T-Bill holdings won't help them, or hurt us.

I expect that after the 2008 Olympics, China is going to get much more belligerent with respect to Taiwan. We'll see what happens if they do...

I agree. Hopefully the Olympics curse will work on them. Berlin 1936, 9 years later, Nazis out of power. Moscow 1980, 9 years later, Commies out of power (kinda, sorta).

[Toddsterpatriot]

Jeez, next you'll book yourself on Oprah!

Asking you for facts gets me on Oprah? You are confused.

The facts are that you lambaste, quite rightly, the snake-oil gold-bug predators;

Hmmmm..at times you make sense.

and wallpaper over the inflationary behavior of the Fed.

Where have I ever, how could I have ever done that? Everybody sees inflation, inflation is caused by the Fed.

Fine, I make money from inflation - that's how I've structured my portfolio.

Me too. You're making sense again.

I expect to see gold more or less double over the next 2-4 years, and my metals and energy stocks to quintuple or better over the same period.

That is certainly possible.

One would be a fool to deliberately ignore the real-world consequences of government profligacy.

Who's doing that? Not me.

FWIW, I own no bullion, only stocks - I'd prefer to buy gold in a few years at much higher levels, frankly, and only as a portion of my cash assets. I'm 95% equities and 5% cash now, and that cash is C$.

Now I remember you. Our friend from north of the border.

[expat_panama]

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

Not everyone looks at it that way, but I want to follow what you're saying.  Let's just say that every penny of US/China trade went just like you said.

This means that last year, the Chinese 'loaned' us Americans $200 billion to buy $200 billion worth of essential stuff.   That comes out to (on average) roughly $700 for every man, woman, and child in the entire US.  Something else though, is the fact that in the same year the total private wealth in the US increased by $5,200 billion.  That comes out to (on average) roughly $17,100 for every man, woman, and child in the entire US. 

I really don't see how this is supposed to be the end of life as we know it.

[College Repub]

Not to sound like a liberal here, but the money they loaned us added onto the debt owed by the country as a whole, or every person in the country. The wealth that was created was not distributed in the same manner. I'm not saying I have a problem with that, I don't. I just wanted to point out that I don't think your comparison is fair.

[Reagan Disciple]

Agreed. Same with Japan. But both require us to technology transfer and given the way Bush seems to be recoiling after the election, no way he agrees to this even if both beg for it.

[Toddsterpatriot]

The facts are that you lambaste, quite rightly, the snake-oil gold-bug predators

I also lambaste people who think a return to the gold standard today would be practical. And the people who think the gold standard wouldn't hurt our economy through deflation. And people who think that there was no inflation (or deflation) while we were on the gold standard.

[headsonpikes]

Like you, I prefer the present monetary system - freely-trading fiat currencies.

As long as I can invest my fiat in the metals biz, I'm a happy camper!

My portfolio is kicking into overdrive currently. Keep those printing presses running!