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Dollar selloff will continue even with better economic data, here is why

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September 04, 2009 – Comments (0)

People were rushing into the dollar as a safety when the world economy was crashing. But now with the economies improving and the USA committed to keeping interest rates and stimulus in place for at least another year even with an improving economy , spells a downward pressure on US Dollar and higher inflation.

One example that the dollar is going to go down is CHINA's move to purchase IMF Bonds.

China to buy first IMF bonds for 50 billion dollars

AFP/File – China has agreed to buy the first International Monetary Fund bonds for about 50 billion dollars

by Veronica Smith Veronica Smith – Wed Sep 2, 4:18 pm ET

WASHINGTON (AFP) – China has agreed to buy the first International Monetary Fund bonds for about 50 billion dollars, the IMF said Wednesday.

IMF managing director Dominique Strauss-Kahn and the deputy governor of the People?s Bank of China, Yi Gang, signed the agreement Wednesday at IMF headquarters in Washington, the multilateral institution said.

Under the agreement, the Chinese central bank "would purchase up to SDR 32 billion (around 50 billion dollars) in IMF notes," it said.

An SDR is an interest-bearing IMF asset based on a basket of international currencies -- the dollar, yen, euro and pound -- that is calculated daily and which members can convert into other currencies.

"The note purchase agreement is the first in the history of the fund," the 186-nation institution said.

The IMF executive board approved the plan to issue notes to governments on July 1.

The issuance of bonds is an unprecedented step to boost IMF resources as the institution struggles to provide financing to help member nations cope with the global financial and economic crises.

"The agreement offers China a safe investment instrument. It will also boost the fund?s capacity to help its membership -- particularly the developing and emerging market countries -- weather the global financial crisis, and facilitate an early recovery of the global economy," the IMF said.

The global economy is beginning to pull out of the worst recession since World War II, according to the institution, but recovery is expected to be sluggish and financial systems remain fragile.

China, whose dynamic economy is expected to lead the global economy out of recession, has been seeking greater representation at the IMF to reflect its rising economic might.

In early June Chinese officials said the government could invest up to 50 billion dollars in IMF bonds.

Brazil, Russia and India -- the other three countries that make up what is known collectively as the BRIC countries -- are seen as potential buyers of IMF bonds and are also in the vanguard of developing countries' drive for greater representation in international bodies.

A deal for Russia to buy up to 10 billion dollars of IMF should be concluded by September, a senior Russian government official said in early July.

Brazil is also in the market for 10 billion dollars' worth of new IMF bonds.

Any bid by China to expand its formal influence at the IMF is likely to encounter resistance, especially from Europe, which has traditionally provided the fund's managing director.

The announcement of the Chinese IMF bond deal came hours after European Union finance ministers agreed to raise the 27-nation bloc's contribution to the IMF to 125 billion euros (178 billion dollars), from 75 billion euros.

 

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