Friday, January 06, 2006
China Hints At Dollar Pullback
The Financial Times has this bombshell on China. "China indicated on Thursday it could begin to diversify its rapidly growing foreign exchange reserves away from the US dollar and government bonds, a potential shift with significant implications for global financial and commodity markets."
"Economists estimate that more that 70 per cent of the reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves, currently accumulating at about $15bn a month, it could put heavy downward pressure on the greenback."
"According to Stephen Green, economist for Standard Chartered in Shanghai, although the language was 'vague,' Thursday's statement was the first time Safe has publicly indicated a shift away from dollar assets. 'It is a subtle but clear signal that they are interested in moving away from the US dollar into other currencies, and are interested in setting up some kind of strategic commodity fund, maybe just for oil, but maybe for other commodities,' he said."
"The Group of Seven leading industrialised economies has repeatedly called for an adjustment in global trade imbalances, including a rise in the renminbi. The US has expressed frustration that China has not allowed its currency to rise significantly after last July's 2 per cent revaluation. That saw China move from a dollar peg to managing its currency against a basket of currencies, potentially allowing the renminbi to rise against the dollar."
"John Snow, US Treasury secretary, speaking earlier on Thursday, repeated his call for China to allow the renminbi to rise against the dollar. 'The trade deficit is influenced by lots of things, differential growth rates, differential savings rates and investment rates and so on. But clearly, getting the [Chinese currency] more appropriately valued will be helpful to the global adjustment process,' he said."
"Economists estimate that more that 70 per cent of the reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves, currently accumulating at about $15bn a month, it could put heavy downward pressure on the greenback."
"According to Stephen Green, economist for Standard Chartered in Shanghai, although the language was 'vague,' Thursday's statement was the first time Safe has publicly indicated a shift away from dollar assets. 'It is a subtle but clear signal that they are interested in moving away from the US dollar into other currencies, and are interested in setting up some kind of strategic commodity fund, maybe just for oil, but maybe for other commodities,' he said."
"The Group of Seven leading industrialised economies has repeatedly called for an adjustment in global trade imbalances, including a rise in the renminbi. The US has expressed frustration that China has not allowed its currency to rise significantly after last July's 2 per cent revaluation. That saw China move from a dollar peg to managing its currency against a basket of currencies, potentially allowing the renminbi to rise against the dollar."
"John Snow, US Treasury secretary, speaking earlier on Thursday, repeated his call for China to allow the renminbi to rise against the dollar. 'The trade deficit is influenced by lots of things, differential growth rates, differential savings rates and investment rates and so on. But clearly, getting the [Chinese currency] more appropriately valued will be helpful to the global adjustment process,' he said."
# posted by Ben Jones @ 6:41 AM 
Comments:
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It is bizarre that US officials are calling for a devaluation of the US dollar. Instead of pushing for balanced budgets/accounts, they insist on a Mexico style end-run by their trading partners. I don't think the typical citizen will like what's coming.
It's a bird, it's a plan, it's SuperGold!!! Guess the reports on China and December employment are hitting home.
Despite Mr. D.'s protests to the contrary (on the HB2 blog), I still think it'll be difficult (if not impossible) for Bernanke to lower rates. The only props to the dollar have been the now-expired Full Employment Act (i.e., dollar repatriation), the now-in-question "strong" economy, and the now-in-doubt rising interest rates. [The foreign CBs actually backed out of the Treasury market quite a while back.] A free-falling dollar is a recipe for rampant inflation, and the Fed just can't allow that.
BTW, see that FSO-referenced article on $1500 gold by July 4th? Very plausible, given the changing Israel vs. Iran dynamic.
Despite Mr. D.'s protests to the contrary (on the HB2 blog), I still think it'll be difficult (if not impossible) for Bernanke to lower rates. The only props to the dollar have been the now-expired Full Employment Act (i.e., dollar repatriation), the now-in-question "strong" economy, and the now-in-doubt rising interest rates. [The foreign CBs actually backed out of the Treasury market quite a while back.] A free-falling dollar is a recipe for rampant inflation, and the Fed just can't allow that.
BTW, see that FSO-referenced article on $1500 gold by July 4th? Very plausible, given the changing Israel vs. Iran dynamic.
Plus it would be nice to the housing speculators and other asset accumulators move into the gold markets where they belong, and leave houses for housing.
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