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NY Times: Foreign interest appears to flag as dollar falls

Section: Daily Dispatches

Dollar Drops Further as Central Banks Reassess Reserves

By Eric Pfanner
International Herald Tribune
at The New York Times
Friday, November 26, 2004

LONDON -- The falling dollar reached new depths against
the euro today, after a weeklong erosion of value prompted
by concern that the dollar's status as the premier
international reserve currency is growing more precarious.

The central bank of Russia said today that it would stop
trying to peg the ruble solely against the dollar, shifting
instead to a target based on a basket of global currencies.
That could result in a decline in dollar purchases by the
Russian central bank, whose currency reserves are
dominated by dollar assets.

The biggest questions hang over Asian central banks,
which have bought hundreds of billions of dollars' worth
of United States Treasury securities and other
dollar-denominated assets in recent years to slow the
decline of the dollar, in order to safeguard their
countries' exports to the United States.

Comments by a Chinese central bank official,
suggesting that the bank might slow its dollar
purchases, briefly sent the American currency into
a volatile spin before they were retracted.

Analysts say any move to shift those banks' assets
out of dollars could result in a sharp long-term fall
in the dollar, given that the United States requires a
steady inflow of close to $2 billion a day in
international funds to finance its current-account
deficit, a broad measure of trade in goods and

"The present situation could be maintained for a
while yet, but overseas investors are unlikely to
continue accumulating dollar assets at the current
rate indefinitely," said Charles Bean, chief
economist at the Bank of England, in a speech
late Thursday. His comments appeared to echo
a warning from Alan Greenspan, chairman of the
Federal Reserve, last week.

By adding more euros and other currencies into
the mix, central banks overseas would be able
protect themselves against a loss of value in their
holdings if the dollar continues to slide. The
currency mixes of those banks' reserves may
also reflect more accurately the trade
relationships of their economies. A number of
comments from Asian central bankers in recent
days suggest that these banks are at least
growing more reluctant to add to their vast
quantities of dollar reserves, even if, analysts
say, no wholesale move to dump them seems

The Chinese central bank official, Yu Yongding,
appeared today to confirm market fears of a
reappraisal of the bank's dollar holdings. The
dollar bounced back, however, after a clarification
from Mr. Yu, published on a Web site. Analysts
said it remained unclear whether any policy
changes were immediately in store at the Chinese
central bank.

"Treat the story with caution, as it appears a tad
dramatic," analysts at ABN AMRO wrote in a note
to investors.

Indeed, the report, from China Business News,
appeared to reflect confusion over the nature of
China's dollar-denominated holdings. It quoted Yu
as saying China had cut its Treasury holdings to
$180 billion. But United States government data
had recently shown Chinese holdings of only $174
billion in Treasury bonds.

If bonds issued by United States government
agencies and other assets are included, however,
China's dollar reserves probably are far higher.

Analysts at Barclays Capital said the central bank
has total international reserves of more than $500
billion, about 70 percent of which probably has
been invested in dollars.

A number of comments from other Asian central
bankers -- often quickly denied when reported by
news agencies -- have fueled speculation that their
employers might consider shuffling their portfolios.

On Tuesday, a Russian central bank official, Alexei
Ulyukayev, said his bank was considering altering
the mix of its reserve holdings, possibly adding more
euro-denominated assets, as the dollar weakens. And
today, the bank's deputy chairman, Konstantin
Korishchenko, said the bank would henceforth aim to
keep the ruble trading within a range determined by
a basket of currencies, not just the dollar.

The dollar, which traded as low as 102.18 Japanese
yen after Yu's remarks, bounced back to 102.59 yen
in New York today, up marginally from 102.58 yen late
Thursday. The euro, which soared as high as $1.3329,
was quoted late in New York at $1.3297, still up from
$1.3240 on Thursday.

The size of the swings in the dollar today may have
been magnified by the fact that currency trading desks
were thinly staffed because of the Thanksgiving holiday
in the United States and because Mr. Yu's comments
came during the nighttime hours in London, the hub of
global foreign-exchange trading.

Still, analysts say the overall tone for the dollar remains
negative amid growing concern about the gap in the
United States current account, as well as the shortfall
in the federal budget.

Against the euro, "$1.35 now seems a natural target in
the current dollar-selling frenzy," the ABN AMRO
analysts wrote.

Other analysts say the dollar could fall further next year.

Still, a cautious tone prevailed in the markets as
traders sought to prevent overexposing their own
positions. Because the dollar has dropped so rapidly,
falling nearly 8 percent against the yen since early
October, for instance, it could bounce back sharply
in the short term as traders take profits.

Also, there is the possibility of market intervention by
central banks to try to prevent a sudden loss of
confidence in the dollar. Most analysts think the
Federal Reserve and the European Central Bank are
unlikely to intervene in the near term, though the ECB
would grow increasingly worried about the strength of
the euro if it climbed over $1.35.

Meanwhile, China has signaled that it will continue to
resist calls to revalue the yuan in the near term, and
Japanese policy makers want to avoid an overly
steep climb in the value of the yen, which could
undermine Japan's economic recovery.

As the dollar has fallen in recent weeks, it has
pushed up the value of gold and oil. Trading in both
of those commodities is denominated in dollars, so
some of the movement is simply a balancing effect
as the dollar weakens. But gold is also seen as a
store of value at times of uncertainty in the markets.

Today as the dollar fell, gold prices briefly surged
above $455 an ounce, the highest price since
June 1988, before easing back.

* * *

Diving Dollar Puts Japan on Notice

By Barney Jopson
Financial Times, London
Friday, November 26, 2004

The conditions for a revival of Japanese currency
intervention appear to be falling into place: The yen
came close to a five-year high against the dollar this
week; foreign exchange worries have depressed the
stock market; and Japanese officials have cranked
up their rhetoric on action against "unstable"
currency moves.

But in spite of growing market expectations, the
"verbal intervention" does not yet seem to have
translated into action. The authorities' decision to
hold fire, analysts say, reflects circumstances today
that are different from those in the six months to
March, when there was a record-breaking Y26,000
billion ($253 billion, E191 billion, 134 billion)
intervention spree.

The economy is now better able to cope with a
stronger yen, says Richard Jerram, economist at
Macquarie Securities, who points to steady
improvements in corporate profits, output, and
business confidence since the start of the year.

Gross domestic product growth has stalled since
April, having run at over 6 percent in the six months
to March.

However, the authorities halted their currency
intervention in mid-March and have stayed out of
the market since then. Mr Jerram says the Ministry
of Finance, which employs the Bank of Japan to carry
out intervention, now has more confidence in the

"In the first quarter there was not a widely held view
that the economy had great durability. There was a
fear that excessive currency moves might end the
recovery," he said.

In comments earlier this week, Hiroshi Okuda, head
of the Keidanren business lobby and chairman of
Toyota Motor, was careful not to sound alarmist
about the effect of a strong yen on the
competitiveness of exporters, linchpins of the
Japanese economy.

With the yen then trading at Y103.3 to the dollar,
before it rose as high as Y102.15 yesterday, Mr
Okuda said: "If the current level persists for a long
time, it will probably have an influence on companies.
We need to watch the situation a little further."

Like many other observers, Tomoko Fujii at Nikko
Citigroup expects the authorities to restart
intervention once the exchange rate hits Y100.

"Exporters have not assumed a double-digit yen
figure," she said, alluding to expectations of a Y106
rate recorded in a recent central bank business survey.
"When yen appreciation begins to undermine
business confidence, then intervention will come."

So far, though, foreign exchange movements have not
forced any companies to downgrade profit forecasts.
This is partly because many put currency hedges in
place in the first quarter to protect themselves until
the end of the fiscal year next March.

For some corporations, Ms Fujii notes, a strong yen
makes life easier. It reduces the burden imposed on
importers by high oil and commodity prices, a point
not lost on the government.

Rather than complain about the level of the exchange
rate, Sadakazu Tanigaki, finance minister, has
continued to condemn the speed of its movement,
which tends to unnerve stock market investors as
much as anything else.

"We will take timely and decisive action against
sudden and unstable movements," he said on Friday,
repeating a mantra used throughout this year.

In starker terms, Hiroshi Watanabe, vice-finance
minister, told Dow Jones last weekend: "The
movement in currencies in the past seven days has
been rapid and erratic, meaning this is the proper
time to think of intervention."

Other policy-makers have not been averse to talking
the yen down. Toshihiko Fukui, Bank of Japan
governor, recently told the Financial Times he was
puzzled at the dollar's rapid fall, given that the US
economy was stronger than that of Europe or
Japan. "From the cyclical perspective, there is no
reason the dollar should be declining," he said.

Currency investors, however, are convinced the US
is willing to let the greenback weaken, and continue
to sell dollars on concern about the US deficits.

Tohru Sasaki, chief foreign exchange strategist
at JPMorgan Chase in Tokyo, says "real money
investors" and companies are driving the dollar
down, not speculators. That raises doubts about
the likely effectiveness of Japanese intervention
as it tends to have the biggest impact only when
speculators follow the Bank of Japan's dollar

"We see structural downward forces on the dollar
and an expectation of upward pressure on Asian
currencies," says Ms Fujii at Nikko Citigroup. "So
there is no guarantee that intervention will be
effective in stemming yen appreciation. It may be


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