Chinese premier voices alarm at dollar's weakness

Section:

By Mure Dickie, Krishna Guha,
Peter Garnham, and Michael Mackenzie
Financial Times, London
Monday, November 19, 2007

http://www.ft.com/cms/s/0/8b1c17dc-96d1-11dc-b2da-0000779fd2ac.html?ncli...

China on Monday expressed concern at the decline in the dollar, joining a growing chorus of global policymakers alarmed by the weakness in the world's main reserve currency.

Wen Jiabao, the premier, told a business audience in Singapore it was becoming difficult to manage China's $1,430 billion foreign exchange reserves, saying their value was under unprecedented pressure. "We have never been experiencing such big pressure," Mr Wen said, according to Reuters. "We are worried about how to preserve the value of our reserves."

China keeps the currency composition of its reserves a state secret, but some analysts believe that more than two-thirds are probably still held in dollars.

The dollar has dropped 16 per cent this year against a basket of major currencies.

Mr Wen's comments came as top international economic officials spoke out in support of a strong dollar in the aftermath of the weekend's Group of 20 summit in South Africa and Opec meeting in Riyadh.

Hank Paulson, US Treasury secretary, told reporters in Ghana: "A strong dollar is in our nation's interest." He said the US economy had had its "ups and downs" but he believed "our long-term economic strength will be reflected in currency markets." Mr Paulson and other top US officials, including George W. Bush, the president, have become increasingly vocal on the dollar, signalling that they are not indifferent to its fate.

Zhou Xiaochuan, China's central bank chief, said Beijing wanted a strong dollar because it would help to ensure an orderly resolution of the recent market instability caused by US mortgage lending problems.

"So in this sense, actually we hope to see a strong dollar," Reuters quoted Mr Zhou as saying. "We support a strong dollar.'

Jean-Claude Trichet, president of the European Central Bank, said Mr Zhou’s remarks "echoed what has been said by the monetary authorities of the US."

Stephen Jen, head of currency research at Morgan Stanley, said: "What we are witnessing is uncoordinated verbal intervention.

"This is useful, as in the absence of it, investors and speculators would have interpreted it as the authorities condoning what was going on in the currency markets."

The Japanese yen rallied against a range of currencies on Monday, notably commodity-based rivals such as the Canadian and Australian dollars. The prospect of China allowing its currency to appreciate against the dollar drove sentiment, traders said.

The dollar was little changed at $1.4655 against the euro and edged 0.1 per cent higher to $2.0504 against the pound. The US currency has shown some tentative signs of stabilisation in the past few days, but many analysts remain bearish.

Russell Jones, head of currency strategy at RBC, said: "Any respite in the dollar's weakness is likely to be temporary. The dollar isn't a safe haven at the moment, because most of the problems facing the world economy are coming out of the US."

Ashraf Laidi, currency strategist at CMC Markets, said, "The power in influencing the fate of the dollar lies increasingly with the oil producers as they struggle with a falling dollar."

Mr Wen's remarks are likely to fuel market speculation that Beijing might move to reduce the proportion of its reserves held in the US currency.

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