Bill Bonner: Greenspan''s whopper


By Rodrigo Davies
Bloomberg News Service
Friday, February 11, 2005

Goldman Sachs Group Inc. said Asian central banks will probably
reduce the amount of dollars they hold as foreign-exchange reserves,
joining Merrill Lynch & Co. and HSBC Holdings Plc in predicting the
U.S. currency will decline for a fourth year.

"You simply don't want to hold all your assets in a currency that's
going to be weakening for the foreseeable future," Thomas Stolper, a
currency strategist at Goldman in London, said in an interview
today. "Changes to central bank reserves are going to be a negative
factor for the dollar.'"

Central banks, including the People's Bank of China and the Bank of
Korea, will lift the portion of euros and yen in their reserves,
Stolper said. Of the three most-traded currencies, the share held in
euros will rise to 32 percent from 22 percent, he estimates. Federal
Reserve Chairman Alan Greenspan said in a Feb. 4 speech in London
that purchases from Asian investors are helping support the dollar.

Goldman Sachs retains its forecast that the dollar will resume its
decline, ending the year at $1.40 per euro and 95 yen, Stolper said.
The dollar traded at $1.2889 per euro and 105.62 yen at 11:40 a.m.
in New York, according to electronic currency- dealing system EBS.

Goldman forecasts the dollar share of reserves held in the three
most-traded currencies will fall to 61 percent from 72 percent at
the end of 2003 and from 77 percent in 1999, the year of the euro's
introduction. The share in yen will rise to 7 percent from 5.4
percent, Stolper said. The 2003 figures are from the April 2004
International Monetary Fund annual report.

The firm, which accounts for 4.5 percent of the $1.9 trillion-a-day
foreign exchange market, will publish a study on central bank
reserves later this month, Stolper said.

Chinese and Japanese investors, including the nations' central
banks, are the two biggest holders of marketable U.S. Treasury
securities, accounting for more than a fifth of the total
outstanding as of November, according to the Treasury Department.
Japan held $714.9 billion and China had $191.1 billion of the $3.95
trillion, the figures show.

Fewer purchases of Treasuries by Asian central banks would send U.S.
10-year yields up as much as half a percentage point, according to
Ralph Axel, a bond strategist in New York at HSBC Securities USA

"As soon as the market catches a whiff of reduced demand from
central banks, that would be bad for confidence," sending U.S.
yields higher, Axel said in an interview on Feb. 9.

HSBC, along with Goldman and Merrill, are among 22 primary dealers
in U.S. government debt that trade with the Fed's New York branch.
Axel forecasts that the 10-year yield will climb to 4.5 percent by
mid-year from 4.08 percent at 10:28 a.m. in New York.

The dollar fell as much as half a percent against the euro on Jan.
24, after a survey sponsored by Royal Bank of Scotland Plc showed
central banks boosted their euro holdings at the expense of the U.S.

Almost 70 percent of the 56 central banks surveyed said they
increased exposure to the 12-nation currency, according to the
survey conducted by Central Banking Publications Ltd., a London-
based publisher, between September and December 2004. Fifty-two
percent said they reduced exposure to the dollar.

"I think it unlikely" that central banks such as China's will keep
most of their reserves in Treasuries, HSBC Chief Executive Officer
Stephen Green said in a speech to a conference in Mumbai on Feb. 9.

U.S. Treasuries were the second-worst performing major government
market in the world last year, returning 3.5 percent to investors,
according to Merrill indexes. Only Japanese bonds, which returned
1.3 percent, did worse among the world's largest sovereign-debt
markets, the data show.

"Governments want their central banks to increase returns, so the
pressure is there to diversify," said Stolper at Goldman. "Once
currency changes have been made, central banks will also look at
riskier assets such as corporate bonds and equities."

International investors bought a net $81 billion in Treasury notes,
corporate bonds, stocks and other U.S. financial assets in November,
up from $48.3 billion in October, the Treasury Department said on
Jan. 18. Figures for December are scheduled for release on Feb. 15.
Foreigners held a record $1.9 trillion in Treasuries at the end of

Merrill, the most accurate forecaster of exchange rates in the year
to Sept. 30 according to a Bloomberg survey, said on Feb. 3 that
central banks may invest in stocks and bonds and increase their
holdings of currencies other than the dollar, as they seek to raise
returns on their foreign-exchange reserves.

"The current holdings of dollars by central banks overrepresent what
a benchmark would look like," Alex Patelis, the firm's chief G-10
currency strategist, said in an interview on Feb. 3. Merrill
estimates the U.S. currency will trade at $1.36 per euro and 91 yen
in 12 months.

By contrast, Stephen Jen, global head of currency strategy at Morgan
Stanley in London and David Hale, chairman of Hale Advisors LLC,
expect that Chinese and Japanese central banks will increase their
holdings of dollars.

"China will not allow its currency to appreciate in 2005, nor will
Japan," Hale, whose clients include hedge funds and other investment
management firms, said yesterday in a speech at a mining conference
in Cape Town, South Africa.

Hale, a member of the Academic Advisory Board of the Fed's Chicago
branch and an adviser to the Hong Kong Monetary Authority, said
Japan will probably boost its foreign reserves to $1.5 trillion in
the next two to three years from January's $821.2 billion. He
predicts China will increase its reserves to $1 trillion from $609.9
billion in the same period.

"There is very little appetite for diversifying out of dollars from
either Japan or China at the moment," Jen said on Feb. 4. He
forecasts the dollar at $1.24 per euro and 96 yen at year-end, from
$1.3552 and 102.63 yen at the end of 2004.

Asian purchases of U.S. assets "may be supporting the dollar and
U.S. Treasury bond prices somewhat," Greenspan said in a Feb. 4
speech in London. Fed Governor Edward Gramlich told a business group
in Pittsford, New York on Feb. 7 that Japan and China are "building
up huge hoards" of Treasuries, which is "keeping the dollar strong."

The Bank of Japan, acting for the Ministry of Finance, sold 14.8
trillion yen ($140 billion) in the first three months of 2004,
following record sales of 20.4 trillion yen in 2003. The sales
helped limit the yen's 2004 gain to 4.5 percent, compared with the
euro's 7.6 percent advance.

The share of dollars in total reserve holdings, including the pound,
Swiss franc, and other currencies, was 63.8 percent at the end of
2003, from 63.5 percent in 2002 and 66.9 percent in 2001, the April
IMF figures show. The euro proportion rose to 19.7 percent from 19.3
percent in 2002 and 16.7 percent in 2001.


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