Posted on 11/10/2006 8:33:03 AM PST by GodGunsGuts
Dollar Drops as China to Diversify Holdings
MoneyNews Friday, Nov. 10, 2006
LONDON -- The dollar sank to a two-month low on Friday after further comments from China's central bank governor Zhou Xiaochuan on the bank's plans to diversify its $1 trillion in currency reserves, while European and Asia shares fell amid soft economic data.
Already under pressure after a weak reading of U.S. consumer sentiment, the dollar extended Thursday's losses after Zhou said China had a clear plan to diversify its FX reserves.
Zhou, speaking at a meeting of central bankers in Frankfurt, said diversification would include different currencies and investment instruments. Although Zhou said there was no change to China's long-standing diversification policy, many traders took his comments to mean China might buy fewer dollars as the country's massive current account surpluses swells its coffers.
"Undoubtedly, the dollar has weakened on the comments. But on the basis of the comments in and of themselves, I wouldn't expect the dollar to continue weakening," said Todd Elmer, currency strategist at Citigroup.
"I'd expect the trend of reserve diversification to be unfavourable for the dollar over time, but we have to be cautious. I'm not sure this rhetoric means you should chase the dollar weakness, but I wouldn't expect significant dollar rebound in the near term," Elmer said, citing interest rate differentials in the coming weeks that are unlikely to be dollar-positive.
The dollar hit its lowest level in more than two months against a basket of major currencies and touched a 2-1/2 month low against the euro at $1.29 per euro.
The dollar and other currencies also came under pressure against the yen overnight after Bank of Japan Governor Toshihiko Fukui said he was concerned about a sharp unwinding of carry trades in which investors borrow the low-yielding Japanese currency and buy higher yielding currencies.
The dollar was buying 117.35 yen.
SHARES DIP
The FTSEurofirst 300 was down 0.1 percent at 1,465.3 points, off Thursday's 5-1/2 year high as weakness in pharmaceutical stocks in particular weighed.
Concerns that drug companies may eventually face price controls from the U.S. government have arisen since Democrats won both the House of Representatives and the Senate in U.S. mid-term elections.
"The view is that for the next little while, that will be a headwind to drug companies in the U.S. It's a sentiment thing," said Stephen Dowds, head of international equities at Northern Trust.
AstraZeneca was down 2.2 percent and rival GlaxoSmithKline fell 1.7 percent.
However, equity markets overall looked attractive, with solid growth and reasonable company earnings, Dowds said.
"Corporate balance sheets are very strong, people are looking for growth and there's a lot of cash sitting on the sidelines in either private equity hands or even in quoted companies' balance sheets."
Data showing the French economy unexpectedly stagnated in the third quarter did equities few favours, while weaker-than-expected machinery orders in Japan helped push the Nikkei to a one-month closing low of 16,112.4 points.
EURO ZONE BONDS FIRM
The prospect of China diversifying further out of dollar denominated assets proved a boost for European government bonds on hopes they might attract more Chinese buying, but analysts noted it was a gradual process.
"It's been an issue for months. We are certainly seeing some diversification into euro zone bonds, but I don't think it's on as big a scale as many people think," said ING's Padhraic Garvey.
The December Bund future rallied to test key resistance at 118.00, up 18 ticks, while the 10-year note was yielding 3.718 percent.
Gold edged up as the dollar weakened and as investors speculated China would diversify into bullion or other commodities.
Zhou said diversification included currencies and investment instruments including emerging markets but asked if this included gold, he said: "That's a separate thing."
Spot gold was trading around $634 an ounce, having touched a two-month peak around $636.50.
Oil prices retreated, giving up most of Thursday's gains as traders booked profits. The International Energy Agency (IEA) noted that inventories in OECD nations had risen at a rate of 1.15 million barrels per day during the third-quarter, the highest third-quarter build in 15 years, but also predicted a jump in demand during the current quarter.
U.S. light crude was down 72 cents at $60.44 a barrel.
I got the $200billion of Chinese trade from the BEA site here, the increase in our private wealth came from the Fed's website here, and the US population came from the Census Br. here. Please tell me where you're getting this stuff about which Americans are rich and which owe what to China --unless you just made it all up which means you're a lot more original than I'll ever be.
I only wish I could've sat behind you in Creative Writing....
Yes, the massive swings between inflation and deflation that we suffered while on the gold standard kinda sucked.
My portfolio is kicking into overdrive currently. Keep those printing presses running!
How do American printing presses help your Canadian portfolio?
Humph!
My Aluminum Company (SPSX) is down 2.1% and my steel (OS) is down 1.8%. Today was one of those days I was glad I had my tech and retail stocks in the mix....
Although my Goldcorp and Encana are off a tad today, my Scorpio Mining is leading my Canadian juniors up. My portfolio is up almost 3% today.
Since last Friday's close, I'm up almost precisely 10% overall. I'm still off 9% from my early May peak valuation. I'm used to volatility - diversification eases the g-forces.
Future's so bright, I gotta wear shades. ;^)
They say the only way to keep from blacking out with those kinds of g-forces is by keeping all the gut-muscles tight, but I got enough gastro-intestinal problems as it is.
You made me remember that my weekly screening is has been as much for controlling volatility as it's been for maximizing return. I used to be into going for the big payoffs but before I tell you about those days I got to take a break for more prune juice...
My sympathies for your gut problems - I went through a kidney thing last year.
After having a totally unbalanced portfolio for years, my diversification has reduced volatility to a bearable amount. Besides, it's only volatility downward I worry about. ;^)
Cheers, and happy capitalism!
At least you're not saying it flat out, but this iTulip chart suggests that evil-mean-old-rich-capitalists are getting all the wealth, and your posting it here suggests that it's the oppressed proletariat who'll owe all this money that the evil rich have borrowed from China. We all know it ain't so.
iTulip shovels out an amazing line. You'd think that nobody could still buy that old saw that the evil capitalists get all their money from the oppressed masses. I mean, we just had a century of watching those very same masses fleeing from their workers' paradises so they could go live with the evil capitalists.
First, let's set aside the party line and see for ourselves that everyone's richer. iTulip won't admit it, but their five-year-old numbers came from Census stats that were proven wrong here. Second, nobody's seen anything yet to back up that other goofy idea that College made up, that somehow it's the poor who'll have to pay back all that money that those rich people borrowed from China.
Ahaaa!
You're the guy that borrowed all that money from China that Guns & College are going to have to pay back!!
---just kidding!
I owe a lot to the Chinese, that's true.
In particular, my fondness for ginger beef and spicy fried squid!
Or it means that our economy is unbalanced and the middle class (the backbone of our republic) is shrinking. If the middle class is shrinking we should quite naturally be asking "why."
If you defined the middle class, we could answer your question.
I think the middle class is shrinking because the middle class is getting rich. Why do you think the middle class is shrinking?
When you said:
"When they decide the bill is due and payable, ..."
you omitted the ending phrase:
"...the Chinese will be powerless to collect that bill."
Think about it. What can the Chinese really do?
(1) Refuse to sell us "flip-flops", thereby putting their own economy in the toilet? LOL!
(2) Sue us because the dollar-denominated securities they bought will "lose value" if they try to sell those securities too quickly? LOL!
(3) Sell their surplus "dollars" to buy "euros", knowing full well that a "falling dollar" will increase the cost of their oil imports and radically diminish the value of the dollar reserves they have now? LOL!
(4) Or FINALLY, increase their purchases of American goods and services in order to bring the trade deficit into balance?
Option 4 is the most likely, IMHO.
Do you remember the saying: "Borrow $100,000 and the bank owns you; borrow $100,000,000 and YOU own the bank."? Bottom line: China has more to fear than we do.
Which nation is more likely to be able to stomach the collapse of its economy, the U.S. or China? If current trends hold, I'm saying it's China. It sometimes seems as if half of the U.S. population starts to whine if some other country even grimaces at us.
We really do hear that a lot, and I'd have to agree that you're in very good company with the idea that America's wealth is increasingly being scooped up by the rich and the American middle class is disappearing. Sure, there're all kinds of numbers that show that the middle class is earning more money than ever before, but like they say, "stats don't matter, people do." That's why everyone will ignore the above link just like they skipped this one.
However I disagree with you that "we should quite naturally be asking 'why'" because we all know why. Namely, the rich are obviously grabbing all the money because they want it and they're evil and they don't hesitate to steal it from us workers --and we're just not going to take it any more!!. Zowie, that's stuff is just terrific for getting Democrats elected, and bringing terrorists back to the US.
It's just that in our personal lives our actions prove that we know it's all a pack of lies. I mean, when people want to get rich and stay rich, they want to live near other rich people, they don't move away from them. Hey, does anyone here believe that all those illegal aliens are coming to the US because they want the evil rich capitalists to rob them?
That iTulip graph that Guns showed us in post 67 has something we all need to see. It'd originally been made up to 'prove' how well off the middle class was doing back in 1979, because the middle class was getting it's fair share of the wealth.
I just noticed that the very same year that was supposed to be so wonderful for the middle class as far as getting an even share, just happened to be the same year that middle class real income was at a record low! 
That's why in terms of actual income, '79 was a disaster for the middle class. After all, those were times of double-digit unemployment and inflation --Carter's malaise daze! Of course, they had an equal share --of nothing!
One more reason (as if any were needed) why this whole redistribution of income is a crock --thanks Guns!
Well, the sooner China diversifies away from dollar- the better [for the US, long term]. Why would one want to owe a lot to a strategic enemy? If one has to owe, it is better to owe to the allies than to enemies, for the creditors are influential lot by definition.
Thanks G, nice to hear another voice of reason on this thread.
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