Where's The Us$ Heading To ?

[sonicdragon]

In all fairness Dr Naam the "loud thinking" was verbalized at two different press conferences on two separate occasions, as I recall. Granted though it's not policy and the statements not made by key policy makers, more like a warning shot.

that is correct CM but the existing reserves were never mentioned. the fact remains that China's USD reserves (UST and cash) are still going up considerably every month although Treasuries have dropped a tiny 0.5% in the reporting period from january 2007 till august 2007.

i also don't see a valid reason why China should fire warning shots as the U.S. can't do too much to strengthen the dollar. if China really acts and puts live ammunition in the gun all what is hit (by dumping treasuries or cash dollars) are their own feet.

as the old proverb says, they are riding a tiger and getting off is simply too dangerous. anyway, interesting times ahead. by the way, CNY appreciation since "stiff peg" until today is quite disappointing.

I think the comments from chinese officials, if reported correctly, show the usual ambuguities so it is not clear whether existing reserves or future reserve accumulation are spoken of. The fact that a vice chairman of the NPC said something like this is quite important in itself. The other person making a similar statement was a relatively unknown official from the PBOC. Nevertheless, I see these kinds of statements (warnming shots if you like) in the same light as those coming from the US congress about imposing trade sanctions - are they current policy: no; is it likely to happen: possibly.

And one more thing about existing chinese reserves, the newly formed China Investment Corp (CIC) did receive an injecttion of existing reserves, so you could say that it has already begun.

/*edit:typo

Edited November 11, 2007 by sonicdragon

[sonicdragon]

As for appreciation of CNY I would be very happy with 5-10% per year for the next 10-20 years

[PeaceBlondie]

The US debt is not a mere 9 trillion dollars, but using correct financial accounting methods, closer to 50 trillion. And the federal govt. is doing absolutely nothing significant to curb the debt. H. Ross Perot woke up a few million voters in 1992, but the warmongers in Congress still feel divinely inspired to fund the war using borrowed money, and to fund everything else that Bush won't veto. But is it clear that the national debt is weakening the dollar?

[sonicdragon]

The US debt is not a mere 9 trillion dollars, but using correct financial accounting methods, closer to 50 trillion. And the federal govt. is doing absolutely nothing significant to curb the debt. H. Ross Perot woke up a few million voters in 1992, but the warmongers in Congress still feel divinely inspired to fund the war using borrowed money, and to fund everything else that Bush won't veto. But is it clear that the national debt is weakening the dollar?

It's clear to me that the national debt is weakening the dollar. Was that a rhetorical question or does it invite an answer ?

I'm curious about your 50 trillion number - how do you arrive at that ? Contingent liabilities (medicare etc) ?

When I look back at (very) recent history I find it remarkable that there was serious discussion about the impending eradication of all the national debt by 2006 and whether the Fed would have to acquire private assets !

It seems that congress doesn't worry too much about the Bush veto, having successfully overturned his veto on the public water works spending bill last week; with an economic slowdown around the corner (maybe already with us) and out of control military spending it seems the budget deficit is not going to get much better in the foreseeable (~1 year) future.

Let's cross our fingers for a Ron Paul GOP nomination

[puipuitom]

When I studied International Currency Affairs in 1980 at the Amsterdam University, we asked our professor that too.

We got as reply: "for future exchange rates for the US$ you have to be at the Faculty of Psychology, NOT at the Fac of Econimics ".

To give you some ideas: when the Euro started, the US$ exchange rate was noted at 1 US$ = Euro 1,179.

Then, becase so much non-taxed W-European money was in circulation, many didnot want to exchange to Euro legally, so escaped to the US$. Result: Euro sank till 1 US$ = E 0,81 A drop in value of (1,179-0,81)/1,179 = 31,3 %.

Then all had to exchange again from US$ to Euro, to be able to use their money. Reuslt: the Euro went up = US$ went down again.

In fact the biggest fiscal clearance ever.

Imagine the TOP is +31,3 %, so: 1,313 * 1,179 = 1 Euro = US$ 1,548. So, we still have something to go till the above value equals the below value.

What we see now: US exports has an easy job, and imports is dramatic. Result: pure automatically US$ will increase.

When ? Ask the Psychologists !

[LaoPo]

This is what I meant earlier with a 'strong basket' of currencies; it seems it's starting:

Bank of Korea to Urge Shipbuilders to Settle in (Korean, LP) Won

Nov. 11 (Bloomberg) -- The Bank of Korea plans to urge domestic shipbuilders to settle contracts in won and to spread hedging activities over time to curb the currency's gains against the dollar.

``For the currency market's stability, we need to take multilateral efforts such as encouraging shipbuilders to settle deals in won and spread sales of currency forward contracts,'' the central bank said in a statement released today in Seoul.

Korean shipbuilders typically sell dollars and buy won in the forward market to keep a stronger currency from eroding the value of vessels sold abroad when revenues are converted. Hyundai Heavy Industries Co., the world's largest shipbuilder, said third-quarter profit more than doubled to a record after it raised vessel prices and as China's trade with Europe and the U.S. spurred demand for ships.

Continues here:

http://www.bloomberg.com/apps/news?pid=206...&refer=news

LaoPo

[sonicdragon]

When I studied International Currency Affairs in 1980 at the Amsterdam University, we asked our professor that too.

We got as reply: "for future exchange rates for the US$ you have to be at the Faculty of Psychology, NOT at the Fac of Econimics ".

To give you some ideas: when the Euro started, the US$ exchange rate was noted at 1 US$ = Euro 1,179.

Then, becase so much non-taxed W-European money was in circulation, many didnot want to exchange to Euro legally, so escaped to the US$. Result: Euro sank till 1 US$ = E 0,81 A drop in value of (1,179-0,81)/1,179 = 31,3 %.

Then all had to exchange again from US$ to Euro, to be able to use their money. Reuslt: the Euro went up = US$ went down again.

In fact the biggest fiscal clearance ever.

Imagine the TOP is +31,3 %, so: 1,313 * 1,179 = 1 Euro = US$ 1,548. So, we still have something to go till the above value equals the below value.

What we see now: US exports has an easy job, and imports is dramatic. Result: pure automatically US$ will increase.

When ? Ask the Psychologists !

Just to correct you on two points of fact [you are entitled to your own opinion, but you are not entitled to your own facts]:

The Euro started trading at 1 Euro = 1.179 US dollars - not the other way around.

The Euro sank to 0.81 US dollars - not the other way around.

You got the part about the reversal to 1 Euro = 1.548 right

I don't think the magnitude of the euro's fall against the $ has anything to do with the magnitude of the dollars fall against other currencies now, though it is a nice way to put it in context.

As for the US devaluing/exporting itself back to prosperity I don't see that is being too likely since the export sector is a small part of the US economy. It's consumer spending that matters the most.

[sonicdragon]

This is what I meant earlier with a 'strong basket' of currencies; it seems it's starting:

Bank of Korea to Urge Shipbuilders to Settle in (Korean, LP) Won

Nov. 11 (Bloomberg) -- The Bank of Korea plans to urge domestic shipbuilders to settle contracts in won and to spread hedging activities over time to curb the currency's gains against the dollar.

``For the currency market's stability, we need to take multilateral efforts such as encouraging shipbuilders to settle deals in won and spread sales of currency forward contracts,'' the central bank said in a statement released today in Seoul.

Korean shipbuilders typically sell dollars and buy won in the forward market to keep a stronger currency from eroding the value of vessels sold abroad when revenues are converted. Hyundai Heavy Industries Co., the world's largest shipbuilder, said third-quarter profit more than doubled to a record after it raised vessel prices and as China's trade with Europe and the U.S. spurred demand for ships.

Continues here:

http://www.bloomberg.com/apps/news?pid=206...&refer=news

LaoPo

The next thing you know, the oil exporters will be wanting payment in gold.

But seriously, it make a lot of sense for exporters to ask for payment in their local currency. Actually, wasn't it Iran who said they wanted to settle some oil sales in euros a while back ? There will be more of that to come, I'm sure.

However, isn't this is a different idea alltogether of a trading block/strong basket of currencies, aka the euro [ie the amero or the asian/ozzie ? [can't see any hope of an asian common currency in my lifetime]....or did I miss your point ?

[PeaceBlondie]

The US debt is not a mere 9 trillion dollars, but using correct financial accounting methods, closer to 50 trillion. And the federal govt. is doing absolutely nothing significant to curb the debt. H. Ross Perot woke up a few million voters in 1992, but the warmongers in Congress still feel divinely inspired to fund the war using borrowed money, and to fund everything else that Bush won't veto. But is it clear that the national debt is weakening the dollar?

It's clear to me that the national debt is weakening the dollar. Was that a rhetorical question or does it invite an answer ?

I'm curious about your 50 trillion number - how do you arrive at that ? Contingent liabilities (medicare etc) ?

When I look back at (very) recent history I find it remarkable that there was serious discussion about the impending eradication of all the national debt by 2006 and whether the Fed would have to acquire private assets !

It seems that congress doesn't worry too much about the Bush veto, having successfully overturned his veto on the public water works spending bill last week; with an economic slowdown around the corner (maybe already with us) and out of control military spending it seems the budget deficit is not going to get much better in the foreseeable (~1 year) future.

Let's cross our fingers for a Ron Paul GOP nomination

I agree about Dr. Ron Paul; veterinary medicine taught him well. He won't get the nomination; he's a Texas maverick.

I got the 50 trillion by adding several years to the estimate given by the Comptroller General of the United States in a speech to the London School of Economics, a year or two ago. He included contingent liabilities such as the unfunded Social Security, Medicare, federal pension plans, etc., based on generally accepted accounting principles for governmental agencies. He should know, being "the CPA for the federal govt."

My question is naive and sincere: is the national debt (by itself) weakening the dollar? Because it must, or because speculators and psychology majors think it should weaken the dollar?

[Naam]

Actually, wasn't it Iran who said they wanted to settle some oil sales in euros a while back ? There will be more of that to come, I'm sure.

it was and China pays since quite some time (i think since february 2007) €URos for iranian crude by using the exchange rate USD/€UR because crude is still (and will be for a long time) priced in USD.

[sonicdragon]

The US debt is not a mere 9 trillion dollars, but using correct financial accounting methods, closer to 50 trillion. And the federal govt. is doing absolutely nothing significant to curb the debt. H. Ross Perot woke up a few million voters in 1992, but the warmongers in Congress still feel divinely inspired to fund the war using borrowed money, and to fund everything else that Bush won't veto. But is it clear that the national debt is weakening the dollar?

It's clear to me that the national debt is weakening the dollar. Was that a rhetorical question or does it invite an answer ?

I'm curious about your 50 trillion number - how do you arrive at that ? Contingent liabilities (medicare etc) ?

When I look back at (very) recent history I find it remarkable that there was serious discussion about the impending eradication of all the national debt by 2006 and whether the Fed would have to acquire private assets !

It seems that congress doesn't worry too much about the Bush veto, having successfully overturned his veto on the public water works spending bill last week; with an economic slowdown around the corner (maybe already with us) and out of control military spending it seems the budget deficit is not going to get much better in the foreseeable (~1 year) future.

Let's cross our fingers for a Ron Paul GOP nomination

I agree about Dr. Ron Paul; veterinary medicine taught him well. He won't get the nomination; he's a Texas maverick.

I got the 50 trillion by adding several years to the estimate given by the Comptroller General of the United States in a speech to the London School of Economics, a year or two ago. He included contingent liabilities such as the unfunded Social Security, Medicare, federal pension plans, etc., based on generally accepted accounting principles for governmental agencies. He should know, being "the CPA for the federal govt."

My question is naive and sincere: is the national debt (by itself) weakening the dollar? Because it must, or because speculators and psychology majors think it should weaken the dollar?

I thought he was an medical doctor (obstetrician) not a vet ? I do know that he's from Texas and led the delegation to nominate Reagan ! Regrettably I think you are right that he won't get nominated - not sure if being from Texas has anything to do with it (I'm not an american so I don't know much about these things), but I do know that he has been systematically portrayed as some sort of fanatic by the mainstream US media when in reality he seems to have a very good grasp of economics (his regular grilliings of Greenspan while on the house banking committee for a long are testament to that).

As to the question about budget deficits and the $, I'm sure you'll get a lot of different answers. Some will even say that deficits don't matter at all (this was almost the Bush (HW) administration official policy after the "no new taxes" dabacle). Although you can't really isolate the budget deficit and say that it's a bad thing for the dollar, what you can do is make some crude simplifications. One simple, but extreme, way to look at is by imagining a situation where all taxes were removed and the government just issued more and more debt, repaying the maturing debt by issuing more debt. Then it simply comes down to confidence - clearly in this case foreigners would not want to own the debt and the value of the dollar would decline . So obviously deficits do matter. But more importantly it's large, sustained deficits that matter. Deficits can be a good thing (for the economy as a whole and the $) - eg for helping to get through cyclical recessions - the main point though is that it depends on what the money is used for [ie productive spending vs pork barrel spending and military folly]. There are heaps of other issues such as "crowding out" private sector investment. I dunno if people really want to discuss this in a lot of detail, but I'm happy to - there should be several points above, and several I haven't mentioned, to discuss....any takers ?

[sonicdragon]

Actually, wasn't it Iran who said they wanted to settle some oil sales in euros a while back ? There will be more of that to come, I'm sure.

it was and China pays since quite some time (i think since february 2007) €URos for iranian crude by using the exchange rate USD/€UR because crude is still (and will be for a long time) priced in USD.

That the reference price is quoted in USD seems largely irrelevant to me - what matters in the context of this discussion is that the payments are made in EUR, and thus importing countries will accumulate reserves in EUR and not in USD.

[lannarebirth]

Actually, wasn't it Iran who said they wanted to settle some oil sales in euros a while back ? There will be more of that to come, I'm sure.

it was and China pays since quite some time (i think since february 2007) €URos for iranian crude by using the exchange rate USD/€UR because crude is still (and will be for a long time) priced in USD.

That the reference price is quoted in USD seems largely irrelevant to me - what matters in the context of this discussion is that the payments are made in EUR, and thus importing countries will accumulate reserves in EUR and not in USD.

I have never understood the argument that one of the reasons for the USD's hegemony was due to it's "petrodollar" status. I think it's a specious argument and the opposing directions in the price of a bbl of oil and a US dollar bill would seem to bear that out. Oil, the USD and the Euro are all readily fungible assets that can be converted to almost any other commodity or currency almost instantaneously, 24 hours per day, with almost zero slippage.

[sonicdragon]

Actually, wasn't it Iran who said they wanted to settle some oil sales in euros a while back ? There will be more of that to come, I'm sure.

it was and China pays since quite some time (i think since february 2007) €URos for iranian crude by using the exchange rate USD/€UR because crude is still (and will be for a long time) priced in USD.

That the reference price is quoted in USD seems largely irrelevant to me - what matters in the context of this discussion is that the payments are made in EUR, and thus importing countries will accumulate reserves in EUR and not in USD.

I have never understood the argument that one of the reasons for the USD's hegemony was due to it's "petrodollar" status. I think it's a specious argument and the opposing directions in the price of a bbl of oil and a US dollar bill would seem to bear that out. Oil, the USD and the Euro are all readily fungible assets that can be converted to almost any other commodity or currency almost instantaneously, 24 hours per day, with almost zero slippage.

I think it is because the USD was, and still is, the leading reserve currency; and the USA had, and still has, exceptionally deep, efficient and robust capital markets. Although it might be changing, it will not (I hope) change dramatically any time soon. 20 years from now I'm sure things will look very different.

[highdiver]

Actually, wasn't it Iran who said they wanted to settle some oil sales in euros a while back ? There will be more of that to come, I'm sure.

it was and China pays since quite some time (i think since february 2007) €URos for iranian crude by using the exchange rate USD/€UR because crude is still (and will be for a long time) priced in USD.

That the reference price is quoted in USD seems largely irrelevant to me - what matters in the context of this discussion is that the payments are made in EUR, and thus importing countries will accumulate reserves in EUR and not in USD.

I have never understood the argument that one of the reasons for the USD's hegemony was due to it's "petrodollar" status. I think it's a specious argument and the opposing directions in the price of a bbl of oil and a US dollar bill would seem to bear that out. Oil, the USD and the Euro are all readily fungible assets that can be converted to almost any other commodity or currency almost instantaneously, 24 hours per day, with almost zero slippage.

since the worlds largest fuell consumer is the USA with a lttle over the 50% of the total world consumption, the latgest energy companies are american controlled and since most oil exporting countries preder the green back then most of the energy trade is done by the USD

the USD's hegemony was created after WW2 when America was the largest single economy in the world and as such it was easier to use the dollar as the leadingg currency.

Now that Europe is a single economy with one currency . we have a choice of switching to Euro.

Most countries and cetral banks are aware that if the reserves that they keeping in dollars are devaluating and they will take mesures to diversify the holdings. this will create a lower dollar.

[pointofview]

7 Countries Considering Abandoning the US Dollar (and what it means)

Jessica Hupp

Saturday November 10, 2007

It’s no secret that the dollar is on a downward spiral. Its value is dropping, and the Fed isn’t doing a whole lot to change that. As a result, a number of countries are considering a shift away from the dollar to preserve their assets. These are seven of the countries currently considering a move from the dollar, and how they’ll have an effect on its value and the US economy.

1. Saudi Arabia: The Telegraph reports that for the first time, Saudi Arabia has refused to cut interest rates along with the US Federal Reserve. This is seen as a signal that a break from the dollar currency peg is imminent. The kingdom is taking “appropriate measures” to protect itself from letting the dollar cause problems for their own economy. They’re concerned about the threat of inflation and don’t want to deal with “recessionary conditions” in the US. Hans Redeker of BNP Paribas believes this creates a “very dangerous situation for the dollar,” as Saudi Arabia alone has management of $800 billion. Experts fear that a break from the dollar in Saudi Arabia could set off a “stampede” from the dollar in the Middle East, a region that manages $3,500 billion.
   
2. South Korea: In 2005, Korea announced its intention to shift its investments to currencies of countries other than the US. Although they’re simply making plans to diversify for the future, that doesn’t mean a large dollar drop isn’t in the works. There are whispers that the Bank of Korea is planning on selling $1 billion US bonds in the near future, after a $100 million sale this past August.
   
3. China: After already dropping the dollar peg in 2005, China has more trouble up its sleeve. Currently, China is threatening a “nuclear option” of huge dollar liquidation in response to possible trade sanctions intended to force a yuan revaluation. Although China “doesn’t want any undesirable phenomenon in the global financial order,” their large sum of US dollars does serve as a “bargaining chip.” As we’ve noted in the past, China has the power to take the wind out of the dollar.
   
4. Venezuela: Venezuela holds little loyalty to the dollar. In fact, they’ve shown overt disapproval, choosing to establish barter deals for oil. These barter deals, established under Hugo Chavez, allow Venezuela to trade oil with 12 Latin American countries and Cuba without using the dollar, shorting the US its usual subsidy. Chavez is not shy about this decision, and has publicly encouraged others to adopt similar arrangements. In 2000, Chavez recommended to OPEC that they “take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers,” or in other words, stop using the dollar, or even the euro, for oil transactions. In September, Chavez instructed Venezuela’s state oil company Petroleos de Venezuela SA to change its dollar investments to euros and other currencies in order to mitigate risk.
   
5. Sudan: Sudan is, once again, planning to convert its dollar holdings to the euro and other currencies. Additionally, they’ve recommended to commercial banks, government departments, and private businesses to do the same. In 1997, the Central Bank of Sudan made a similar recommendation in reaction to US sactions from former President Clinton, but the implementation failed. This time around, 31 Sudanese companies have become subject to sanctions, preventing them from doing trade or financial transactions with the US. Officially, the sanctions are reported to have little effect, but there are indications that the economy is suffering due to these restrictions. A decision to move Sudan away from the dollar is intended to allow the country to work around these sanctions as well as any implemented in the future. However, a Khartoum committee recently concluded that proposals for a reduced dependence on the dollar are “not feasible.” Regardless, it is clear that Sudan’s intent is to attempt a break from the dollar in the future.
   
6. Iran: Iran is perhaps the most likely candidate for an imminent abandonment of the dollar. Recently, Iran requested that its shipments to Japan be traded for yen instead of dollars. Further, Iran has plans in the works to create an open commodity exchange called the Iran Oil Bourse. This exchange would make it possible to trade oil and gas in non-dollar currencies, the euro in particular. Athough the oil bourse has missed at least three of its announced opening dates, it serves to make clear Iran’s intentions for the dollar. As of October 2007, Iran receives non-dollar currencies for 85% of its oil exports, and has plans to move the remaining 15% to currencies like the United Arab Emirates dirham.
   
7. Russia: Iran is not alone in its desire to establish an alternative to trading oil and other commodities in dollars. In 2006, Russian President Vladmir Putin expressed interest in establishing a Russian stock exchange which would allow “oil, gas, and other goods to be paid for in Roubles.” Russia’s intentions are no secret–in the past, they’ve made it clear that they’re wary of holding too many dollar reserves. In 2004, Russian central bank First Deputy Chairmain Alexei Ulyukayev remarked, “Most of our reserves are in dollars, and that’s a cause for concern.” He went on to explain that, after considering the dollar’s rate against the euro, Russia is “discussing the possibility of changing the reserve structure.” Then in 2005, Russia put an end to its dollar peg, opting instead to move towards a euro alignment. They’ve discussed pricing oil in euros, a move that could provide a large shift away from the dollar and towards the euro, as Russia is the world’s second-largest oil exporter.
   

What does this all mean?

Countries are growing weary of losing money on the falling dollar. Many of them want to protect their financial interests, and a number of them want to end the US oversight that comes with using the dollar. Although it’s not clear how many of these countries will actually follow through on an abandonment of the dollar, it is clear that its status as a world currency is in trouble.

Obviously, an abandonment of the dollar is bad news for the currency. Simply put, as demand lessens, its value drops. Additionally, the revenue generated from the use of the dollar will be sorely missed if it’s lost. The dollar’s status as a cheaply-produced US export is a vital part of our economy. Losing this status could rock the financial lives of both Americans and the worldwide economy.

Edit: you can add Japan and quote a few otheres to this list as well as countless private idividuals world wide

Edited November 11, 2007 by pointofview

[admiraldy]

I dont know why many of you are so worried about the decline in the value of the $ , while in reality if you go back to history , you can find that back in 1995 the value of $ was equivalent to todays value , and let me remind you that in the year 2000 , the EURO hit an all time low of 0.82 per 1$ , after it hit 1.46 in the year 1995 .

[pointofview]

I dont know why many of you are so worried about the decline in the value of the $ , while in reality if you go back to history , you can find that back in 1995 the value of $ was equivalent to todays value , and let me remind you that in the year 2000 , the EURO hit an all time low of 0.82 per 1$ , after it hit 1.46 in the year 1995 .

Well its probably better that you dont know - but try thinking about the most basic reason: like american expats are seeing the value of their US holdings slip away at an alarming rate.

[LaoPo]

I dont know why many of you are so worried about the decline in the value of the $ , while in reality if you go back to history , you can find that back in 1995 the value of $ was equivalent to todays value , and let me remind you that in the year 2000 , the EURO hit an all time low of 0.82 per 1$ , after it hit 1.46 in the year 1995 .

That was before the actual coins and paper Euros came on the market in 2002.

"The euro was introduced to world financial markets as an accounting currency in 1999 and launched as physical coins and banknotes in 2002. It replaced the former European Currency Unit (ECU) at a ratio of 1:1." Wikipedia.

I don't know where you found a 1.46 exchange rate in 1995 since the Euro didn't exist in that year -yet-. Maybe you meant the ECU...(European Currency Unit) ?

LaoPo

Edited November 11, 2007 by LaoPo

[britmaveric]

I dont know why many of you are so worried about the decline in the value of the $ , while in reality if you go back to history , you can find that back in 1995 the value of $ was equivalent to todays value , and let me remind you that in the year 2000 , the EURO hit an all time low of 0.82 per 1$ , after it hit 1.46 in the year 1995 .

Well its probably better that you dont know - but try thinking about the most basic reason: like american expats are seeing the value of their US holdings slip away at an alarming rate.

Well - if you are worrying about currency rates perhaps its time to move?

[Mighty Mouse]

China has been threatening (if that's the right word) to diversify out of the US$ since at least 2004 and has actually been gradually diversifying small amounts since 2002.

Should they do so on a large scale, world markets would definitely react. We could expect turmoil to say the least.

When you consider that about 70% of China's external surplus is invested in dollars (treasury securities) you begin to understand what a huge impact it would have on the dollar should they actually diversify. The dollar would be hit hard, bond yields and hence mortgage rates would be affected, resulting in perhaps an abrupt collapse of the housing market.

The big question for China would then be, "Where do we now put our money?"

Any diversification would have to be gradual. If they invested into euros, it would push down the dollar. China would then not only suffer a capital loss on its remaining dollar reserves, but it could also be forced to buy yet more reserves to hold its own currency down against a weaker dollar.

The Euro may not be the best option as it is still undervalued in terms of the dollar, so there would be little, if any, financial benefit to China.

Let's consider diversification into the Yen.

The following was written by C. Bergsten of the Petersen Institute: Chinese diversification of several hundred billion dollars into yen would promote both systemic and Chinese national interests. It is almost universally agreed, including in Japan, that the yen is substantially undervalued against all currencies, except the renminbi itself and perhaps a few other Asian monies, even after its recent modest rise. Adjusted for inflation, the yen is weaker today than in 1998, when the United States and Japan intervened jointly to reverse its precipitous decline, and in 1985, when the Plaza Agreement initiated intervention by the Group of Five leading industrial countries to weaken the dollar, especially against the yen.

This yen weakness persists despite the five-year recovery of the Japanese economy and the country’s record current account surpluses that are exceeded globally only by China’s. Japanese officials have not manipulated the yen since their massive interventions ended three years ago but it is the persisting misalignment, rather than its cause, that matters and needs urgent correction.

Chinese purchases of yen with a significant portion of their dollar hoard, by strengthening the yen against the dollar in an orderly manner over a sustained period, would thus help correct one of the most important currency misalignments now contributing to the global imbalances. As the markets become aware of such official action, they would probably magnify the extent of yen appreciation and thus promote the needed realignment. This particular form of diversification would probably minimize the inevitable capital losses that China will experience in renminbi terms because the yen is one of the few currencies that needs to rise in value almost as much as the renminbi itself.

Japan is a much larger holder of Treasures, so if they made any change in their foreign exchange policy, that could also have a significant and immediate impact on U.S. markets.

Japan however, tend to be more conservative regarding fiscal policy so it is doubtful that they would make such a move.

Possibly all the rumblings we are now hearing from the various countries about diversification is just their way of warning the US that they cannot continue to run high current account deficits and then try to counter that by large overseas borrowings.

To reduce the trade deficit, other countries have to be willing to reduce their trade surpluses, and so far they've shown no willingness to do that.

[Naam]

I dont know why many of you are so worried about the decline in the value of the $ , while in reality if you go back to history , you can find that back in 1995 the value of $ was equivalent to todays value , and let me remind you that in the year 2000 , the EURO hit an all time low of 0.82 per 1$ , after it hit 1.46 in the year 1995 .

That was before the actual coins and paper Euros came on the market in 2002.

"The euro was introduced to world financial markets as an accounting currency in 1999 and launched as physical coins and banknotes in 2002. It replaced the former European Currency Unit (ECU) at a ratio of 1:1." Wikipedia.

I don't know where you found a 1.46 exchange rate in 1995 since the Euro didn't exist in that year -yet-. Maybe you meant the ECU...(European Currency Unit) ?

LaoPo

"Admiraldy" must have used the ECU which gives a (99%) correct result.

[Naam]

As for appreciation of CNY I would be very happy with 5-10% per year for the next 10-20 years

fact is the appreciation of CNY vs. USD since "fixed peg" middle of 2005 was a mere ~3.70% p.a. and a depreciation vs. €UR, GBP, AUD and a bunch of other currencies.

where's the beef?

Edited November 11, 2007 by Naam

[sonicdragon]

As for appreciation of CNY I would be very happy with 5-10% per year for the next 10-20 years

fact is the appreciation of CNY vs. USD since "fixed peg" middle of 2005 was a mere ~3.70% p.a. and a depreciation vs. €UR, GBP, AUD and a bunch of other currencies.

where's the beef?

I was including interest and the move in July 05:) I don't think you'll see dramatic moves in the CNY - it would not be good for the domestic economy and that's what the policy makers focus is on. If they do decide to make some more one-off bigger moves to placate the EU and USA then it's a nice bonus. I'm in it for the long term.

[sonicdragon]

I dont know why many of you are so worried about the decline in the value of the $ , while in reality if you go back to history , you can find that back in 1995 the value of $ was equivalent to todays value , and let me remind you that in the year 2000 , the EURO hit an all time low of 0.82 per 1$ , after it hit 1.46 in the year 1995 .

Do you think we need a reminder on that, since we've been discussing it this very thread just a few hours before your post ?

[chiang mai]

I see Mr Bernake (sp) was telling Congress that whilst the US economy will continue to be impacted through 2007 and early 2008 he believes the underlying US economy (non banking) remains sufficiently strong that it will rebound in 1 or 2Q08. I buy that and look for GBP/USD to hit 2.15. possibly a little lower and then bounce around 2Q08. Remember you heard it here first!

[BEENTHEREDONETHAT]

Just heard on Bloomberg that China has raised it's interest rates to 13.5% to cool down the economy. They have a 1.48 trillion dollar surplus and the US has a 9 trillion+ deficit. The US debt (2006) was 64% of it's GDP that happens to be the same as Argentina who are famous for their money problems. The debt number was from CIA website which list all countries.

Not attempting to make a point just found the comparisons interesting.

[sonicdragon]

Just heard on Bloomberg that China has raised it's interest rates to 13.5% to cool down the economy. They have a 1.48 trillion dollar surplus and the US has a 9 trillion+ deficit. The US debt (2006) was 64% of it's GDP that happens to be the same as Argentina who are famous for their money problems. The debt number was from CIA website which list all countries.

Not attempting to make a point just found the comparisons interesting.

Quite wrong I'm afraid. What you probably heard was news about increasing the reserve requirement for banks from 13% to 13.5%, which is a very very different thing to raising interest rates to 13.5%

[Naam]

Just heard on Bloomberg that China has raised it's interest rates to 13.5% to cool down the economy.

if that was the case i'd be on a flight to Shanghai, open an account and put all my cash in it

[cclub75]

I do not understand the hype.

Secretary Paulson is again and again speaking about the "strong US dollar is in our nation's interest".

This guy is like a headless chicken... on the Titanic.

The boat is sinking, but he still repeat that the US supports a strong dollar...

He should make a phone call to his friend Bernanke...

I mean : we know since Goebbels that propaganda is the art of repetition. But in this case, the more Paulson open his mouth, the more he's loosing all form of credibility.