U.S. dollar whipsaws on worries over China

International Herald Tribune ^ | November 27, 2004 | Eric Pfanner

[tvn]

LONDON The dollar went for a see-saw ride Friday, plunging after a comment from a Chinese policy maker appeared to undermine already fragile market sentiment toward the U.S. currency, but rebounding after the official retracted the remark.

The dollar, which has been falling against the yen for two months, and for much longer against the euro, went into a steeper skid after reports that Yu Yongding, a Chinese central bank official, had confirmed one of the biggest fear in the currency market: that China would slow its purchases of U.S. Treasury securities, which have kept the dollar from falling even further, faster.

So far, they have shown a willingness to do so because it keeps their currencies from rising too quickly against the dollar. That, in turn, stimulates Asian exports to the United States, which allows China and its neighbors to keep factories running at full steam.

The China Business News article reported that China had cut its U.S. Treasury holdings to $180 billion. It is unclear how much they previously totaled; U.S. government data had recently shown holdings of only $174 billion in Treasury bonds, though analysts at ABN AMRO said the $180 billion figure probably included other U.S. bonds, issued by government agencies and the like. In that case, the total previously could have been significantly higher.

As the dollar has fallen in recent weeks, it has pushed up the value of gold and oil. Trading in both of those commodities is denominated in dollars, so some of the movement is simply a balancing effect as the U.S. currency weakens. But gold is also seen as a store of value at times of uncertainty in the markets. On Friday, gold prices briefly surged above $455 per ounce as the dollar fell, highest since June 1988, before easing back.

[ARCADIA]

a Chinese central bank official, had confirmed one of the biggest fear in the currency market: that China would slow its purchases of U.S. Treasury securities

What a dope! (he is undermining his own holdings)

....and, yes we are in trouble.

[Last Dakotan]

....and, yes we are in trouble.

Just wait, the one or two individuals who still argue that free trade with a communist state is in the best interest of the United States on this forum will be here to tell you that everything will be fine.

That and/or make fun of your well reasoned position with "We are doomed" quotes.

[Chgogal]

Hmmmm....all of a sudden people are so worried about the trade deficit. That may be reasonable. But if the US stops buying foreign products, the world WILL go into a recession. Europeans, because of their tax system cannot be big buyers. The Chinese and Indians are not in the position to be the worlds' buying engine, yet. Well then, who can do what we do?

If the currency gurus who worry about the Current Account want the dollar to fall, so be it. But presently, there is no other country that can do what we do. PERIOD.

[Dalite]

"What a dope! (he is undermining his own holdings"

At what part of the continuing slide does he cease to be a dope and become viewed as someone acting to minimize his loss?

The US Dollar is based on faith and confidence. Over 50% of our debt is owned by overseas investors.

At some point, they are going to have to make decisions about the future of their economies and their people.

Your are right; we are in trouble. I hope the downward spiral doesn't last long enough to cause our debt owners to go on a selling spree.

[ARCADIA]

Well then, who can do what we do?

For Petes sakes all that we are doing is borrowing money. It's is not a hard skill set to replace. :-)

More seriously, if the dollar weakens to the point where we can no longer buy as much from China as we use to, the demand for Chinese goods would drop, perhaps lowering the price to a level where the Chinese population can enjoy more of what they produce. As the Yuan appreciates against the dollar, not only do we get poorer, but the Chinese may perhaps get richer.

[ARCADIA]

At what part of the continuing slide does he cease to be a dope

When he acts first and speaks later.

[Chgogal]

The deficit yes. But no one understands the trade deficit. I cannot figure it out. The way I see it, if I want to buy a BMW, I buy it. That increases the trade deficit. BMW gets the cash. They pay taxes, O&M and invest their remaining Euros. Also remember, the trade deficit does not take into account service dollars spent. Like I said, no one understands the trade deficit. Remember the trade deficit and the deficit are two separate deficits. I'm talking about the trade deficit that is one of the lynch pins currency traders are chatting up today.

[ARCADIA]

Also remember, the trade deficit does not take into account service dollars spent.

The US Current Account does include all trade and services and represents the trade balance between ourselves and our trading partners.

Here is a news release from September with some details: http://www.bea.gov/bea/newsrel/transnewsrelease.htm

When we import foreign goods we either pay for them by exchanging trade, or by exchanging currency and debt. We have not been doing well on the trade side, and our mounting debt is getting to a point where people are concerned that it cannot be sustained.

[nanak]

"Specie is the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war." --Thomas Jefferson to John Wayles Eppes, 1813. ME 13:430

"Paper is poverty,... it is only the ghost of money, and not money itself." --Thomas Jefferson to Edward Carrington, 1788. ME 7:36

"Experience has proved to us that a dollar of silver disappears for every dollar of paper emitted." --Thomas Jefferson to James Monroe, 1791. ME 8:208

"It is a [disputed] question, whether the circulation of paper, rather than of specie, is a good or an evil... I believe it to be one of those cases where mercantile clamor will bear down reason, until it is corrected by ruin." --Thomas Jefferson to John W. Eppes, 1813. ME 13:409

[nanak]

...and no country has ever spent it's way to prosperity.

...and to country has ever debased it's currency to prosperity.

[Dalite]

"When he acts first and speaks later."

That is a good benchmark. It will be trouble for us, but it will declare his intentions in clearly recognizable terms.

[nanak]

Where are you going to buy our MILITARY UNIFORMS from?

[Chgogal]

The trade deficit is you and me buying Chinese products and BMWs. Stop buying at Cosco and Home Depot and look for the "Made in USA" stamp. The trade deficit and the budget deficit are TWO DIFFERENT ANIMALS.

[Chgogal]

The trade deficit is you and me buying Chinese products and BMWs. Stop buying at Cosco and Home Depot and look for the "Made in USA" stamp. The trade deficit and the budget deficit are TWO DIFFERENT ANIMALS.

[Travis McGee]

These are the good old days.

[Lessismore]

But no one understands the trade deficit. I cannot figure it out.

For a tutorial see The Basics of Foreign Trade and Exchange -- Economic Education -- The Federal Reserve Bank of New York

[Chgogal]

Thank you for the tutorial.

What puzzles me with the verbiage one constantly hears is the following, "So far, foreigners are willing to lend the United States money to finance the current account imbalances, Greenspan pointed out. The worry, however, is that at some point foreigners might suddenly lose interest in holding dollar-denominated investments. That could cause them to unload investments in US stocks and bonds, sending their prices plunging and interest rates soaring".

I don't understand where the lending comes in regarding the Current Account. You and I buy oil, cars, Chinese made stuff. Unless we are going into credit card debt...there is no lending. My wealth is being transferred to the Mideast, Germany (if I purchase a BMW) or to China. The foreign entities are paying taxes, expenses and then investing the remainder (either locally or internationally). There is no lending. Now, if these foreign entities wish to invest their new wealth differently then they did yesterday, that is a different story. I personally do not see a better place for investment than the US due to tax laws, possibilities of future growth, etc.

Please enlighten me. I wouldn't mind knowing what you know. None of my Econ profs could explain it properly.

[durasell]

If the dollar continues to fall, then it won't be seen as such a great investment by the Japanese, Chinese and Brits, the three largest buyers of our bonds and basically the "credit card company" financing our national debt. If they threaten to pull out and stop buying our bonds, then the Fed has to raise interest rates to sweeten the pot. If interest rates are raised -- home sales and loans to businesses decline. Home values may even take a hit, because those low interest rates vanish.