China says it will act this year on currency convertibility


By Vivianne Rodrigues and Jake Lee
Bloomberg News Service
Saturday, February 26, 2005

The dollar fell against the euro and the yen for a second week on
speculation Asian central banks may slow purchases of U.S. assets
and use other currencies for reserves.

The dollar dropped the most in six months against the euro and the
most in four months versus the yen on Feb. 22, after the Bank of
Korea said it intended to change the mix of its reserves, or
holdings of foreign currencies. Denials the next day by Japan and
South Korea, which hold most of the world's currency reserves, of
any plans to sell dollars failed to alleviate investor concern.

"One of the Asian central banks saying they may reduce their
holdings of U.S. assets got everybody nervous," said Andrew Busch, a
currency strategist at Harris Nesbitt Corp. in Chicago. "The risk
involved with that possibility is going to make people be on pins
and needles for a while."

Against the euro, the dollar declined 1.3 percent this week to
$1.3245 late yesterday in New York, from $1.3072 a week earlier,
according to electronic currency-dealing system EBS. It fell 1.6
percent the previous week. The dollar weakened 0.4 percent to 105.23
yen, from 105.65.

"Asset diversification among foreign central banks is having a big
impact on the dollar," said Lara Rhame, a currency strategist at
Credit Suisse First Boston in New York. "It will continue to weigh
on the currency."

Rhame was an economist at the Federal Reserve Bank of New York from
1993 to 1995. CSFB forecasts the dollar will weaken to $1.35 per
euro by the end of March.

The dollar's decline accelerated yesterday after it weakened to
$1.3210 per euro, a level that triggered automatic orders to sell
the currency, according to Chris Melendez, president of currency
hedge fund Tempest Asset Management in Newport Beach, California.

The U.S. announced its revision to fourth-quarter economic growth
yesterday. The economy expanded at a 3.8 percent pace last quarter,
compared with a previous estimate of 3.1 percent, the government
report showed. The median forecast in a Bloomberg survey was 3.7

"We're not going to see the dollar do better on this kind of
economic data," said Geoff Kendrick, a currency strategist in London
at Westpac Banking Corp. "Unless we get the wild card of inflation
spiking higher, interest rates aren't going to go up any faster."

The dollar may fall to $1.34 per euro in two weeks, he said.

The U.S. currency is up 2.3 percent against the euro since the end
of last year, and in January had the best month since May 2001, in
part on expectations for higher U.S. interest rates to spur currency

Fed policy makers raised the target rate for overnight loans between
banks six times since June, to 2.5 percent. The European Central
Bank has, by contrast, kept its benchmark rate at 2 percent, the
lowest in six decades for the 12-nation euro region, since June

"Inflation remains well controlled," Fed Governor Ben Bernanke said
on Feb. 24 after a speech in Little Rock, Arkansas. "I'm therefore
comfortable with our policy of removing accommodation at a measured
pace." The Fed has used the "measured" term to describe its plan for
lifting the rate in each statement accompanying the rate increases
since June.

Japan's currency rose against the euro and the dollar as Japanese
stocks rose, fueling speculation inflows from overseas investors
will increase. The Nikkei 225 Stock Average closed at 11,658.25,
close to its seven-month high of 11,660.12 reached on Feb. 18.

"The Nikkei is doing pretty well and investors are assuming the
economy will come out of a temporary lull," said Callum Henderson,
global head of currency strategy in Singapore at Standard Chartered
Plc. The yen may gain to 103.50 within two weeks, he said. "Money
continues to come in from abroad and that's good for the yen."

Foreign investors were net buyers of Japanese shares for the 18th
straight week, government figures showed. Foreigners bought 343.1
billion yen ($3.3 billion) in the week ending Feb. 18, and purchased
289.7 billion yen in Japanese bonds, the Ministry of Finance said.

The yen is still down about 3 percent against the dollar since
reaching a five-year high of 101.69 on Jan. 17, on concern Japan's
economy, the world's second largest, is faltering. A government
report on Feb. 15 showed the third straight quarterly contraction in
the final three months of 2004, sending the economy into its fourth
recession since 1991.

A government report showed Japan's core consumer prices fell 0.3
percent last month from a year ago, the most since May. The country
is headed for its seventh straight year of deflation, or falling

The dollar fell 1.4 percent against both the euro and the yen on
Feb. 22, after a Bank of Korea report to legislators on Feb. 18
showed it plans to diversify holdings and buy Australian and
Canadian assets. The plan needs parliamentary approval. The dollar
rose the following day after the bank said in a statement it didn't
plan to sell dollars.

"Nobody in the market believes diversification is over," said Adrian
Schmidt, head of currency strategy at Royal Bank of Scotland Group
Plc in London. The South Korea news "was the trigger for the dollar
to go lower." He forecasts the dollar will fall to 95 yen and $1.37
per euro by year-end.

Asian central banks including Japan and Korea have sold their
currencies to keep the dollar's slide from hurting export
competitiveness. Policy makers from Japan, China, South Korea and
Southeast Asian nations met in Thailand this week to discuss the
dollar's three-year decline.

South Korea has the world's fourth-largest currency reserves,
holdings of foreign currency at central banks, with $200 billion.
Masatsugu Asakawa, director of the foreign exchange markets division
at Japan's finance ministry, also said on Feb. 23 that Japan didn't
have plans to sell dollars in its reserves, the world's largest at
$821 billion.

"With the risk of the dollar declining, it makes sense for them to
get out of dollar assets," said Carsten Fritsch, a currency
strategist at Commerzbank AG in Frankfurt. Commerzbank predicts the
dollar will fall to $1.35 per euro and 104 yen in three months. The
bank was the second-most accurate forecaster of the dollar against
the euro in the 12 months ended Sept. 30, according to a Bloomberg
survey of 50 firms.

The U.S. currency dropped 34 percent against the euro and 22 percent
versus the yen in the three years through 2004.

The dollar is set for its sixth month of losses against the euro in
the past seven. Against the yen, the dollar is poised for the third
straight monthly gain in February.

U.S. dollars account for majority of the world's foreign- exchange
reserves. The dollar share was 63.8 percent at the end of 2003, down
from 66.9 percent two years before, according to International
Monetary Fund figures released in April last year.


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