Money and Metals

The Washington Post reports on the biggest currency story going. "China has resolved to shift some of its foreign exchange reserves, now in excess of $800 billion, away from the U.S. dollar and into other world currencies in a move likely to push down the value of the greenback, a high-level state economist who advises the nation's economic policymakers said in an interview Monday."

"The Chinese central bank has invested roughly three-fourths of its growing foreign currency reserves in U.S. Treasury bills and other dollar-denominated assets. The new policy reflects China's fears that too much of its savings is tied up in the dollar, a currency widely expected to drop in value as the U.S. trade and fiscal deficits climb."

"Stephen Green, senior economist with the bank Standard Chartered PLC in Shanghai, identified several signals that China is intent on limiting its exposure to the dollar, not least, a recent pledge from the State Administration of Foreign Exchange to 'actively explore more efficient use of our foreign exchange reserves.'"

"'We believe this adds to the downside pressure the U.S. dollar is currently facing,' Green wrote. 'It is the first official expression from SAFE that they are looking at switching away' from the dollar."

"The comments on SAFE's Web site reinforced earlier public warnings from Yu Yongding, an economist on the monetary policy committee of China's central bank, that the country's reserves are now vulnerable to a drop in the value of the dollar."

"Not all economists anticipate negative repercussions for the U.S. economy. Were China and Japan to engineer a significant fall in the dollar, those nations also would suffer the consequences, sharply diminished exports as Americans lose spending power, plus a drop in the value of their dollar assets. 'It is thus extremely unlikely that China would do anything to harm its own balance sheet,' wrote Stephen Jen, an economist with Morgan Stanley."

"Warnings about an impending Chinese sell-off in dollars emerged in July, as China slightly altered the way it sets the value of its currency, the yuan, bumping it up against the dollar by about 2 percent. The move temporarily muted criticism on Capitol Hill from those who accuse China of currency manipulation."

"China sought to quash such talk. In September, a senior central bank official told a ballroom full of international executives gathered in Beijing that China would not sell significant quantities of U.S. bonds, cognizant that such a move would cause the price to plunge."

"Even if a Chinese shift away from the dollar weakened the currency, that would probably not soothe tensions with those in Washington calling for an increase in the value of the yuan to help U.S. manufacturers. Unless China severs the link between the value of its currency and the dollar, a move Beijing says could destabilize its economy, then a weaker dollar would simply mean a weaker yuan as well, leaving in place the current debate over whether China's export earnings are being netted unfairly."