Money and Metals

The Associated Press reports on the US dollar. "The U.S. dollar dropped to nearly two-and-a-half month lows against the euro Thursday on mixed U.S. data and renewed concerns over central bank diversification. After rallying on the back of better-than-expected U.S. trade data, the dollar began retracing its steps, pushed further by a weak consumer sentiment report and an unexpected rise in September wholesalers' inventories."

"Comments by Chinese central bank Governor Zhou Xiaochuan that China has a plan to diversify its reserves and is considering various ways of doing so prompted the dollar to extend its losses, particularly against its European rivals."

"'Zhou's comments provided a "good excuse to sell the dollar,' said Alan Ruskin, head of international strategy at RBS Greenwich Capital. The dollar's failure to capitalize on the trade data boost is 'a solid negative' dollar signal, he added."

"The dollar came under further pressure as the University of Michigan reported that its consumer sentiment survey dropped to 92.3 from 93.6 rather than an expected rise to 93.8. News that U.S. wholesale inventories piled up at a higher-than-expected rate during September as sales took their biggest drop in three years did not help the dollar."

"But the dollar's most significant drop came on the back of comments from Zhou during afternoon trading. 'The market is taking this as a sign that (China) will diversify out of the dollar,' Andrew Busch, global market strategist at BMO Capital Markets said. 'We've been hearing (this type of news) for weeks.'"

"China's yuan rose to a new high the U.S. dollar on Thursday to its highest level since Beijing revalued the currency 16 months ago. The yuan's appreciation, while still gradual, has been accelerating recently. Almost every week, it hits new highs against the dollar."

"Thursday's rate of 7.8697 to dollar broke the high set Wednesday, when the yuan closed at 7.8661 on China's tightly controlled currency markets. Since Beijing cut its direct link to the U.S. currency on July 21, 2005, the yuan has gained about 3 percent."

"But the United States and other trading partners are pushing for a faster rise, saying a weak yuan is contributing to China's bulging trade surplus by making Chinese exports cheaper and more competitive."

From mw. "The U.S. dollar tumbled and gold rallied Thursday on heightened expectations that China will diversify its rapidly-growing foreign-exchange reserves."

"Gold futures climbed to their highest level in two months after Zhou's comments. 'The remarks are especially crucial a few days after reports showed China's currency reserves have attained the $1 trillion mark, making such diversification plans inevitable,' said Ashraf Laidi, chief foreign-exchange analyst at CMC Markets in New York. 'We have long warned against the diversification wave by global central banks in light of the peak in U.S. interest rates and the need to diversify into other currencies and commodities that are boosted by steadying commodity prices,' he said."

"Central banks worldwide have been diversifying their reserves since 2001, according to Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. Since then, they have reduced their holdings of the U.S. dollar from 70% of reserve assets to 66% at the end of March 2006. A number of countries, including Sweden, the United Arab Emirates, Qatar, and Russia all announced intentions this year to diversify their reserves away from dollars."

"Leading government think tanks in Beijing have recently recommended using some of their reserves to buy other assets such as gold and oil, which bodes well for gold.
'About 60% of total international reserves were held in gold in 1980. That figure was just 9% in 2005,' Crescenzi said. 'Obviously there is plenty of scope for central banks to increase their gold reserves going forward.'"

"However, he said 'it's very unlikely that China would consider a large switch in its dollar reserves."

"Gold futures for December delivery rose $18.50, or 3 percent, to $636.80 an ounce on the Comex division of the New York Mercantile Exchange, the highest close since Sept. 6. The percentage gain was the biggest since June 30."

"Oil rose as much as 2.4 percent to $61.26 a barrel today in New York after gaining 1.5 percent yesterday. Gold and oil often move together. Price charts also indicated gold may climb, some analysts said. The metal has traded above its 200-day moving average since Nov. 1."

"'Gold has taken on a life of its own,' said Matt McKinney, a commodity broker at Infinity Brokerage Services in Chicago. 'If it gets any help from a weaker dollar or stronger oil, that would surely catapult it.'"

Silver also rallied, closing above $13 an ounce for the first time since Sept. 6. Futures for December delivery rose 50 cents, or 4 percent, to $13.05.