The story is taken from Bloomberg and I highlighted the important points in red. Nov. 7 (Bloomberg) -- The dollar slumped to a record low against the euro after Chinese officials signaled plans to diversify the nation's $1.43 trillion of foreign-exchange reserves in response to a falling U.S. currency.
``We will favor stronger currencies over weaker ones, and will readjust accordingly,'' Cheng Siwei, vice chairman of China's National People's Congress, told a conference in Beijing. The dollar is ``losing its status as the world currency,'' Xu Jian, a central bank vice director, said at the same meeting.
The dollar fell against all 16 of the most-active currencies, declining to the weakest versus the Canadian dollar since the end of a fixed exchange rate in 1950, a 26-year low against the pound and a 23-year low versus the Australian dollar.
``We're likely to see further pressure on the dollar,'' said Thomas Harr, senior foreign exchange strategist in Singapore at Standard Chartered Plc, a U.K. bank that makes most of its profit in Asia. ``The potential for diversification is quite big.''
The U.S. currency slumped to $1.4666 per euro, the lowest since the 13-nation currency debuted in January 1999, before trading at $1.4656 as of 9:05 a.m. in London, from $1.4557 late yesterday. The dollar traded as low as 113.69 yen, the lowest since Oct. 22. The euro was little changed at 166.80 yen.
The dollar fell to an all-time low against the synthetic euro, a theoretical value that estimates where the currency would have traded before its inception. The prior record was $1.4557 set in 1992.
The U.S. currency may fall to $1.50 against the euro, Harr said.
China's Reserves
Chinese investors have reduced their holdings of U.S. Treasuries by 5 percent to $400 billion in the five months to August. China Investment Corp., which manages the nation's $200 billion sovereign wealth fund, said last month it may get more of the nation's reserves to invest to improve returns.
U.S. 10-year Treasury notes rose today on speculation a two- day increase in yields will lure investors to buy them at a $13 billion sale of the securities today.
``The world's currency structure has changed; the dollar is losing its status as the world currency,'' Xu from the People's Bank of China said at the conference. Cheng, speaking to reporters after his speech, said his comments don't mean China will buy more euros.
``Cheng has a history of speaking out on a range of financial market and economic developments, and his comments are not always accurate,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong.
Cheng's remarks on Jan. 30 that China's stock rally was a ``bubble'' caused the benchmark index to fall the most in almost two years on Jan. 31. The Shanghai and Shenzhen 300 Index, then over 2,500 points, has since climbed above 5,300.
ECB
Gains in the euro may be limited by speculation European economic growth may slow, reducing the need for higher interest rates.
The European Central Bank will keep its key rate at 4 percent tomorrow, according to all 61 economists surveyed by Bloomberg News. Data yesterday showed manufacturing orders in Germany fell more than expected in September.
``There is a European industrial complex which is now suffering from the euro being at such super expensive levels,'' said Peter Pontikis, treasury strategist at Suncorp-Metway Ltd. in Melbourne. ``The data all suggest you'll get a real slowdown. I'd be against the possibility of a rate hike.''
Europe's single currency will trade at $1.43 versus the dollar by year-end, according to the median forecast of 42 analysts and brokerages surveyed by Bloomberg News.
Commodities Prices
The dollar's decline helped drive the price of crude oil to a record $98 a barrel and gold to a 27-year high, encouraging investors to buy assets in commodity-producing nations.
Commodity currencies led the gains in currencies today. The pound rose to $2.0955, the highest since May 1981. The Canadian dollar advanced to $1.1010. The Australian dollar gained to 93.89 U.S. cents, the highest since April 1984, from 92.87 U.S. cents. The rand rose to 6.4490 per dollar, the highest since May 2006.
The dollar's 9.8 percent drop against the euro this year boosted the competitiveness of U.S. exports, helping shrink the nation's trade deficit to $57.6 billion in August, the smallest since January.
French President Nicolas Sarkozy yesterday brought his concerns to the U.S., saying ``you don't need too weak a dollar'' to spur growth in the world's largest economy.
``This is an asset story and shows sentiment for the dollar continues to be quite negative,'' said David Forrester, currency economist at Barclays Capital in Singapore.
The Australian dollar gained after the country's central bank raised its benchmark borrowing cost to 6.75 percent today. Governor Glenn Stevens, announcing today's quarter-point rate increase, said inflation will exceed his target.
Dollar Depreciation
The dollar fell against the Norwegian krone as traders added to bets Norway's central bank will increase its 5 percent deposit rate. It declined to 5.3011 kroner, from 5.3474. The dollar also fell as losses from subprime-mortgage defaults added to pressure on the Federal Reserve to lower its target for the overnight lending rate between banks to 4.25 percent next month.
``The interest-rate outlook is dragging down the dollar against major currencies such as the euro and the Australian dollar,'' said Seiichiro Muta, director of foreign exchange in Tokyo at UBS AG, the world's second-largest currency trader. ``I cannot see the bottom of the dollar depreciation yet.''
Subprime Loans
Interest-rate futures traded on the Chicago Board of Trade show a 62 percent chance of a quarter-percentage point Fed rate cut on Dec. 11, compared with 6 percent a month ago. Citigroup Inc. may write down an additional $2.7 billion worth of subprime- related assets, CreditSights Inc. said yesterday.
New Zealand's dollar rose to 78.38 U.S. cents from 78 U.S. cents on speculation a report tomorrow will show the unemployment rate remained at a record low, boosting the chance of another increase to the country's record 8.25 percent benchmark interest rate.
``The dollar is weak against a host of currencies, including the euro, the pound and the Australian dollar,'' said Mitsuru Sahara, senior currency sales manager at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly traded lender. ``We can't tell how much money banks will lose on subprime loans. The Fed is likely to cut rates again before the end of the year.''
Last Updated: November 7, 2007 04:12 EST This important issue is that US now show significant reaction to China’s intention to diversify and this might potentially show the power shift from US to China. The intention of Chen SiWei to announce their plan is unknown as they would have known that such announcements will devalue the US dollar. Thus what we see now is a consolidation, especially in Singapore market, maybe because of the “kiasi-ness”, we are at the sidelines watching how events unfold first. And it could be seen as many have closed their positions today as they do not want to hold their positions overnight, which resulted in selling down of shares. While we thrive to be a world class market, the nature of our market is very sentiment driven. Most of us react to daily movements of Dow Jones, or Hang Seng, or European markets to guide our market direction. Even for me, I always tend to use daily movements of these markets as a guide. So now we know that we are still consolidating, what can we expect from our market? Firstly, it won’t be surprising if we see a long consolidation as many will have the “sell on strength” mentality. Secondly, STI will generally be directionless as they will be looking for someone to “follow”. Thirdly, China stocks will be pressed down for the time being. Personally, a few of my counters have hit the down trend. It’s most probably time to trim my trading positions, and of course my CFDs. It’s disappointing that I have to do that as I was actually quite bullish for the remaining of the year. But trends don’t lie, and while it seems directionless, the fact is that it turned downwards recently. In accordance to my system, I will have to cut some of them, and that means 2/3 of AsiaEnv, ½ of PacAndes, ½ of CAO, all of OKP(CFD) and all of AdvSCT(CFD). It’s a loss but at least it is true to my system. Labels: NenixDreams Fund |
