Posted on 11/27/2006 10:49:42 AM PST by GodGunsGuts
Diversification talk adds to euro debt glow
Mon Nov 27, 2006 7:54 AM ET
By Ana Nicolaci da Costa and George Matlock - Analysis
LONDON (Reuters) - Renewed talk of central banks diversifying their foreign currency reserves out of dollars should add to the longer-term appeal of euro-denominated bonds.
People's Bank of China Governor Zhou Xiaochuan said earlier this month that China is looking to diversify its $1 trillion reserves across currencies and asset classes, sharpening a long-running debate about the dollar's dominance that has intensified since Europe's single currency was launched in 1999.
PBOC Deputy Governor Wu Xiaoling fueled the discussion on Friday, warning that Asia's huge dollar-centric foreign exchange reserves were exposed to a fall in the dollar.
This helped trigger a sharp rally in the euro to a 19-month high above $1.31 and lifted euro zone government bond futures to six-week peaks.
With other central banks such as those in Russia, Switzerland and oil-exporting nations announcing similar intentions recently, the highly liquid euro zone government debt market looks set for more gains.
"Central banks' diversification policy has not so far changed. It is not that they are selling dollars so much as simply not buying so many dollars. Bunds can be expected to be a beneficiary of that," said the head of bonds trading at a major bank in London who asked to remain anonymous.
"There is no evidence whether diversification or domestic management is supporting the (bond) market, but certainly it helps to keep yields lower in Europe," he said.
The cash yield on benchmark 10-year euro zone government debt dipped on Friday below 3.70 percent . A fall below 3.6380 percent would herald a fresh eight-month low for the yield, which moves inversely to bond prices.
LONG-TERM GAIN
It's nothing new for global central banks to seek to spread risks into new currencies and assets. Nor is there any fresh information on how fast this will happen.
But the euro's huge move on Friday and the ripples it sent throughout global financial markets show just how sensitive markets have become to such talk, especially given the growth of China's reserves as its trade surplus swells and the increase in oil producing countries' investment funds as crude remains near $60 a barrel .
Even slight shifts in official currency-trading patterns are worth billions of dollars.
Global FX reserves are just shy of $4.6 trillion, according to the latest International Monetary Fund figures, of which the composition of $3.05 trillion is known. Around 65 percent of that is in dollar-denominated assets and 25 percent in euros.
China doesn't report the composition of its reserves but they are widely thought to be heavily invested in U.S. Treasury notes and bonds.
United Arab Emirates central bank chief Sultan Nasser al-Suweidi said last week that the euro could overtake the dollar as the world currency in under 10 years.
U.S. bond markets are still the biggest, most liquid and sophisticated in the world and the dollar remains the key global currency. Still, a big slice of future reserve accumulation will probably continue to find its way into euro-denominated assets.
"Even though the euro does not yet provide stiff competition to the dollar in terms of competing for the (lion's share of) world central banks' foreign exchange reserves, I believe that the diversification into euros will, indeed, increase over the next 10 to 20 years," said Dr Komal Sri-Kumar, chief global strategist at TCW, part of Societe Generale Asset Management.
Such diversification should be a slow process, however, whose results would only become apparent in the very long term. Besides euro assets, foreign central banks are eyeing other currencies such as the yen.
"We've had Russia, Switzerland and China mentioning diversification into not just euros but also other currencies such as the yen," said Andre de Silva, global deputy head of bond strategy at HSBC.
"So the de-emphasis is dollars, the target is not necessarily just euros: it could and is likely to be other currencies," de Silva said.
ping.
* Yawn *
Doesn't this mean foreign goods will become more expensive and so jobs will return to the US?
There's nothing you [or me] could do about it, besides boycotting Chinese crap and not adding to the trouble. Even Ben Bernanke might find it hard to have an input in these things.
China isn't going to do anything, unless it really plans on going broke.
Do you really think they are going to drop the dollar and lose the income from the U.S.? Especially considering how much Americans spend on Chinese goods?
Highly unlikely.
Do you have any idea what this could mean???
http://www.jsmineset.com/cwsimages/Miscfiles/3789_USDX_chart.pdf
"Do you have any idea what this could mean???"
From the way you're trilling about it, I'll just assume you believe it means an increase in the price of gold.
Yes I do. And they will do it for political reasons. It's all part and parcel of the Eurasian Alliance's push for a "multipolar" world.
Screw the price of gold. I would rather take a huge loss than let this happen.
One of the things saving our bacon is the fact that our debt is in USD. Unlike in other countries that had to convert currencies.
ping
You mean the money that you borrow to buy Chinese-made junk? No, they will use the power of U.S. tax authorities to beat the money out of you for the next 30 years.
Gold and silver are not a huge part of my portfolio. They are considered cash, not an investment and the 8-10% increase each year has helped me keep ahead of inflation.
It's not chicken little BS. If we lose the dollar as the preeminent reserve currency of choice, not only will it devastate the economies of our major allies, it will sink the USD. One of the main things propping the dollar up (in the face of our massive triple deficits) is the fact that the oil producing nations ONLY accept US dollars for oil transactions. This is one of the main reasons so many countries have large dollar reserve holdings. If the USD loses this status, and the oil producing countries begin to accept the Euro and/or other currencies for oil transactions, the dollar will free-fall. The world will then start dumping the USD in a panic and the privilege that America has enjoyed by being the issuer of the same will evaporate. Everything from insignificant manufactured goods to oil will become much more expensive (inflation). We need to get the dollar on sound footing again, or we as a nation will reap the consequences.
Pray tell...what fundamentals are you talking about???
We need to get the dollar back on a workable gold standard. For starters, we could mandate the FED to peg the dollar to gold. This would not initially require that the FED be able to back up the dollar with gold. It would just mandate that they sell or buy bonds to keep the dollar in sync. with the price of gold. We can worry about going to a full-fledged gold standard later.
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