Dollar Falls to Record on China's Plans to Diversify Reserves

[Mel_and_Daniel 1]

Dollar Falls to Record on China's Plans to Diversify Reserves

By Min Zeng

Nov. 7 (Bloomberg) -- The dollar fell to a record versus the euro and the lowest since 1981 against the pound after Chinese officials signaled plans to diversify the nation's $1.43 trillion of foreign exchange reserves.

The U.S. dollar also declined to the cheapest versus the Canadian dollar since the end of a fixed exchange rate in 1950 and a 23-year low against the Australian dollar. The New York Board of Trade's dollar index touched to 75.077, the lowest since the gauge started in March 1973.

``The dollar sell-off was sparked by concern that foreign central banks' diversification away from dollar assets may accelerate,'' said Paresh Upadhyaya, who helps manage $29 billion in currency assets at Putnam Investments in Boston. ``The momentum to sell the dollar still persists and I expect further dollar weakness before year end.''

The U.S. currency fell 0.5 percent to $1.4624 per euro at 3:55 p.m. in New York and touched $1.4731, the cheapest level since the 13-nation currency started trading in January 1999. The dollar weakened 1.7 percent, the most since Sept. 7, to 112.80 yen. The yen rose 1.2 percent against the euro to 164.96 as declines in U.S. and European stocks prompted investors to trim higher-yielding investments funded by loans in Japan.

The dollar will decline to $1.50 per euro by the end of the year, according to Upadhyaya.

The dollar also fell to an all-time low against the synthetic euro, a theoretical value that estimates where the currency would have traded before its inception. The prior record was $1.4557 set in 1992. The dollar touched 1.1258 versus the Swiss franc, the weakest since 1995. The Chinese yuan rose to the highest since a dollar link was scrapped in July 2005.

`Losing Its Status'

The dollar is ``losing its status as the world currency,'' Xu Jian, a central bank vice director, told a conference in Beijing. ``We will favor stronger currencies over weaker ones, and will readjust accordingly,'' Cheng Siwei, vice chairman of China's National People's Congress, said at the same meeting.

Chinese investors have reduced their holdings of U.S. Treasuries by 5 percent to $400 billion in the five months to August. China Investment Corp., which manages the nation's $200 billion sovereign wealth fund, said last month it may get more of the nation's reserves to invest to improve returns. China is the second-largest holder of U.S. government debt after Japan.

``The big issue on any currency is if its rate of depreciation is so fast that it scares away all capital, and the announcement that we heard from China sort of feeds those fears,'' said Larry Smith, who manages $400 million as chief investment officer at Third Wave Global Investors Greenwich, Connecticut.

International investors sold a record amount of U.S. securities in August as soaring credit costs sparked an exodus from stocks. Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.5 billion in July, the Treasury Department said in Washington on Oct. 16.

Paulson on Dollar

Since Henry Paulson, the former chief executive of Goldman Sachs Group Inc., became Treasury secretary in July 2006, the dollar has lost about 12 percent against six major currencies on a trade-weighted basis. The Chinese yuan gained 7.4 percent while the yen advanced 1 percent over the same period, among the least in major currencies. China and Japan are among the five biggest exporters to the U.S.

U.S. lawmakers say China keeps the currency artificially weak to make its exports more competitive. The Senate Finance Committee in July approved legislation aimed at pushing China to let the yuan trade more freely. China's trade surplus with the U.S. reached an all-time high last year.

Brookly McLaughlin, a spokeswoman at the Treasury, said today that Paulson's position on the currency hasn't changed since Oct. 30 in Mumbai, when he told an audience that he was ``strongly committed to a strong dollar.''

Trade War

The dollar's 11 percent drop against the euro this year boosted the competitiveness of U.S. exports, helping shrink the nation's trade deficit to $57.6 billion in August, the smallest since January.

French President Nicolas Sarkozy told a joint session of the U.S. Congress in Washington that the Bush Administration must stem the dollar's plunge or risk triggering a trade war.

The euro's break of the synthetic high set in 1992 cleared a ``strong resistance,'' which could allow the currency to rise at a faster pace unless there are comments from European nations against its advance, said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon in New York, the world's largest custodian bank with more than $20 trillion in assets under administration.

Oil, Gold

``There are no real levels left,'' said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. ``Trying to find one is a fools' game now. I guess psychologically $1.50 is the only major level. But this last wave higher has been so fast that it's hard to have any levels in mind.''

The dollar's decline helped drive the price of crude oil to a record $98.62 a barrel and gold to a 27-year high, encouraging investors to buy assets in commodity-producing nations.

The Canadian dollar advanced to as high as $1.1040. The Australian dollar touched 94.01 U.S. cents, the highest since 1984, from 92.88 U.S. cents yesterday. The rand rose to as high as 6.4294 per dollar, the highest since May 2006, while Norway's krone touched the strongest since 1981.

``The world's currency structure has changed,'' Xu said at the conference in Beijing. Cheng, speaking to reporters after his speech, said his comments don't mean China will buy more euros. The National People's Congress, China's legislature, isn't involved in setting currency policy.

The European Central Bank will keep its key rate at 4 percent tomorrow, while the Bank of England may hold borrowing costs at 5.75 percent, according to surveys from Bloomberg News. The Federal Reserve cut its rate to 4.5 percent last week, the second reduction since September, and interest-rate futures show 70 percent odds the central bank will cut again in December.

Europe's single currency will trade at $1.43 versus the dollar by year-end, according to the median forecast of 42 analysts and brokerages surveyed by Bloomberg News.

http://www.bloomberg.com/apps/news?pid=206...&refer=home

[russ 1]

Dollar Falls to Record on China's Plans to Diversify Reserves

How low can the dollar go? The Europeans are going to get tired of this soon. Pretty soon central bankers will need to intervene and start buying dollars.

[trailmix 77]

If China, Europe, the Middle East or any large nation wants to screw with the US they could dump their US holdings and cause as much economic damage to us and really sink the value of the dollar.

China would be hurt more than us if they tried that.

http://www.visajourney.com/forums/index.php?showtopic=88626

interesting!

Edited November 7, 2007 by trailmix

[Jaseball 0]

If China, Europe, the Middle East or any large nation wants to screw with the US they could dump their US holdings and cause as much economic damage to us and really sink the value of the dollar.

China would be hurt more than us if they tried that.

http://www.visajourney.com/forums/index.php?showtopic=88626

interesting!

Blah, sometimes being right doesn't make me happy.

[Jasman0717 9]

This whole dollar thing has me worried. The dollar is down to 43.1 pesos to the dollar now. That is about a 10% drop a year over the past three years. I might have to downsize our vacation home plans in Cagayan

[stuartx13 3]

This whole dollar thing has me worried. The dollar is down to 43.1 pesos to the dollar now. That is about a 10% drop a year over the past three years. I might have to downsize our vacation home plans in Cagayan

I was thinking the same thing i need the doller strong and the paso weak.