Dollar
Slumps To Record On China's Plans To Diversify Reserves
By Agnes Lovasz &
Stanley White
08 November, 2007
Bloomberg
Nov. 7 (Bloomberg)
-- The dollar fell the most since September against the currencies
of its six biggest trading partners after Chinese officials signaled
plans to diversify the nation's $1.43 trillion of foreign exchange reserves.
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.
The New York Board of Trade's dollar index dropped to 75.21 today, the
lowest since the gauge started in March 1973.
``Further weakening of the
dollar is very likely,'' said Teis Knuthsen, the Copenhagen-based head
of foreign-exchange, fixed-income and derivative research at Danske
Bank A/S, the Nordic region's second-biggest lender. China may ``diversify
out of dollar holdings.''
The U.S. currency slumped
to $1.4704 per euro, the lowest since the 13-nation currency debuted
in January 1999, before trading at $1.4671 as of 7:15 a.m. in New York,
from $1.4557 late yesterday. The dollar dropped the most in two months
against the yen, trading as low as
112.87 yen. The euro fell against the yen to 165.84, from 166.99 yesterday.
The U.S. dollar index may
be due for a reversal, according to a technical indicator. Its 14-day
relative-strength measure fell to 21.38 today, below the 30 mark, which
may signal the currency's decline has bottomed out.
In technical analysis, investors
and analysts study charts of trading patterns and prices to forecast
changes in a security, commodity, currency or index.
Chinese Comments
``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 also 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 weaken
to between $1.48 and $1.50 against the euro by year-end, Knuthsen said.
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.
Treasuries Rise
U.S. 10-year Treasury notes
rose today as mounting credit-market losses and declines in stocks pushed
investors to the safety of government debt.
``The world's currency structure
has changed,'' Xu said at the conference in Beijing. Cheng, speaking
to reporters after his speech, said his comments don't mean China will
buy more euros. The National People's Congress, China's legislature,
isn't involved in setting currency policy.
``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 the following day. The Shanghai
and Shenzhen 300 Index, then over 2,500 points, has since climbed above
5,300.
The euro's gains may be limited
by speculation European economic growth may slow, reducing the need
for higher interest rates.
ECB 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.
``The euro is clearly overvalued
against the dollar,'' Emanuele Ravano, co-head of European strategy
for Pacific Investment Management Co., which manages the world's biggest
bond fund, said late yesterday in Brussels. The ECB ``over the course
of 2008 will totally change its tune'' by cutting in the second half.
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.
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
Commodity currencies led
the gains today. The Canadian dollar advanced to $1.1040. The Australian
dollar gained to 93.98 U.S. cents, the highest since April 1984, from
92.87 U.S. cents. The rand rose to as high as 6.4294 per dollar, the
highest since May 2006. The
pound rose to $2.1052, the highest since May 1981.
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 raised concern about the euro's strength during a
visit 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 the quarter-point
rate increase, said inflation will exceed the bank's target.
Pressure on Fed
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 5.2835 kroner, from
5.3474. The dollar also dropped 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.''
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 78.35 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.
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