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China Bashes the Dollar...Again (now including the missing paragraph)

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June 26, 2009 – Comments (1) | RELATED TICKERS: UDN

I usually risk permanent loss of sight by perusing Bloomberg.com's white on black website while having my coffee every morning.  Today the retinal burn was worth it.  I came across a number of great articles that anyone who is interested in the direction that the economy is headed should pay attention to.

The first about yet another call from Chinese officials, this time the country's central bank, for a new global reserve currency to replace the U.S. dollar.  In its 2008 review that it published today, China's central bank once again called for a new global currency saying “To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations."  If even called for the IMF to manage more of members’ foreign-exchange reserves.

Not surprisingly, as is par for the course when a major holder of dollars basies it, the dollar is down in early trading.  In my opinion Chinese diversification of its currency holdings is likely.  It has already started to slowly cut back on its dollar holdings, reducing them by $4.4 billion in april (to $763.5 billion).  That was the first monthly drop in China's dollar holdings since February 2008.  The May numbers are not out yet, but we definitely need to pay close attention to them.

A diversification of its holdings makes sense for China.  If I was them, I personally would want to hold a basket of currencies, including some gold, as well as spend my money to snatch up as much of the world's resources on the cheap while I can.  Having said this, a complete replacement of the U.S. dollar as the world's reserve currency is very, very unlikely any time soon.  This leads me to believe, as I have been saying, that we will experience a gradual, persistent decline in the value of the dollar rather than a complete implosion like some are looking for.  The evidence supports that this actually has been happening for a number of years.  According to IMF statistics, at the end of 2008 the dollar accounted for 64% of global central bank reserves, down from 73% in 2001.

Foreign central banks continue to purchase Treasuries at a rapid pace.  Federal Reserve holdings on behalf of central banks and institutions rose the third most on record in May by $68.8 billion, up 3.3%.  This is a little misleading because we are issuing more debt than ever so foreigners had better be buying more of it, but it indicates that they continue to buy Treasuries even while they are bashing the dollar.  Actions speak louder than words.  There may come a time when the market begins to choke on the massive amount of debt that the U.S. has to issue to finance its tremendous budget deficit, but that time has not come yet.

Today's Chinese statement is at least the second time this month that it has called for a new reserve currency.  On June 16th at a meeting in Russia, Russian President Dmitry Medvedev, Chinese President Hu Jintao, India's Prime Minister Manmohan Singh, and Brazil's President Luiz Inacio Lula da Silva issued a statement calling for a “more diversified” monetary system.  Back in May China and Brazil started talking about moving towards using yuan and reais to settle trade instead of the dollar.

China Reiterates Call for New World Reserve Currency

Deej

1 Comments – Post Your Own

#1) On June 26, 2009 at 11:25 AM, biotechmgr (34.09) wrote:

Fine and dandy for them to say this while controlling the value of the yuan.

They'll keep buying Treasuries but at some future time they will likely slow the buying enough to demand higher interest rates. Like all assets, Bob Prechter expects a decline in T-Bond prices and increase in yields.

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