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Peter Brimelow: Painting a ''perfect picture'' for gold?
Dollar Falls on Chinese Diversification Fears
By Steve Johnson
Financial Times, London
Tuesday, April 4, 2006
http://news.ft.com/cms/s/0ca841d4-c3c7-11da-bc52-0000779e2340.html
The US dollar extended losses in European morning trade on Tuesday
amid a call from a Chinese politician for China to stop buying US
Treasuries.
The dollar had already been soft in the wake of Monday's
disappointing US data, with Ashraf Laidi, chief currency analyst at
MG Financial, pointing out that the US manufacturing index had
fallen below the level of its equivalent eurozone measure for the
first time in three years.
However, the dollar slipped lower still on Tuesday as Cheng Siwei, a
vice chief of China's National People's Congress, was quoted as
saying that "China can stop buying dollar-denominated bonds,
increase buying of US products, and gradually reduce its holdings of
US bonds."
China's foreign exchange reserves hit $853.6 billion last week,
overtaking those of Japan as the largest in the world. The bulk of
these funds are believed to be invested in US assets, and any
suggestion that Beijing may reduce these holdings, or even slow the
pace of accumulation, would re-open the debate over the funding of
the vast US current account deficit, probably dragging the dollar
lower in the process.
As a result of Mr Cheng's intervention the dollar fell 0.4c to
$1.2171 against the euro, 0.55c to $1.7454 against sterling and 0.4
centimes to SFr1.2999 against the Swiss franc, although it was
steady at Y117.73 against a soft yen.
A number of Asian currencies firmed in the belief that any change of
policy in Beijing could result in the renminbi being allowed to rise
at a faster pace, potentially pulling other developing Asian
currencies higher. The South Korean won rose Won7.3 to Won963.1 to
the dollar, with the Thai baht Bt0.15 better at Bt38.65 to the
greenback.
Nevertheless, there were many in the market keen to play down Mr
Cheng's comments, which the People's Bank of China distanced itself
from.
Barclays Capital pointed out that Mr Cheng is a head of a smaller
Chinese party, is not a decision maker on China's economic or
financial policy, and has not been involved with key policy
decisions on exchange rate or monetary policy. "His comment seems to
have triggered some market reactions which were overdone in our
view," Barclays told clients.
Sebastien Barbe at Calyon viewed Mr Cheng's comments as more to do
with political jockeying ahead of a visit by Hu Jintao, the Chinese
president, to the US later this month than with a change in China's
foreign exchange strategy.
Derek Halpenny, senior currency economist at Bank of Tokyo-
Mitsubishi, also saw dollar weakness as being driven by interest
rate speculation, with some commentators bringing forward their
expectations for the timing of future Japanese and eurozone rate
rises, at a time when US policy tightening is seen as almost
complete.
"Market participants refusing to price in any further hikes by the
Federal Reserve beyond 5 per cent makes the dollar vulnerable in the
near-term," he said. "Any further dollar weakness today will confirm
this as being the worst one-week performance for the dollar after a
rate hike since the dollar rally took hold in March 2005 and may be
an indication that interest rate support for the dollar is ebbing
away."
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