US$ Slumps As China Looks To Park Reserves Elsewhere

Source : The Business Times, November 8, 2007

Greenback is losing status as world currency, says China central bank official

THE US dollar slumped to a record low against the euro after Chinese officials signalled plans to diversify the nation's US$1.43 trillion of foreign exchange reserves in response to a falling US currency.

'We will favour 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 US dollar is 'losing its status as the world currency', Xu Jian, a central bank vice-director, said at the same meeting.

The US 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.

'We're likely to see further pressure on the dollar,' said Thomas Harr, senior foreign exchange strategist in Singapore at Standard Chartered. 'The potential for diversification is quite big.'

The US currency slumped to US$1.4666 per euro, the lowest since the 13-nation currency made its debut in January 1999. The US dollar traded as low as 113.69 yen, the lowest since Oct 22. The euro was little changed at 166.87 yen.

In Singapore, the US dollar ended half a per cent lower at S$1.4412 yesterday.

Chinese investors have reduced their holdings of US Treasuries by 5 per cent to US$400 billion in the five months to August. China Investment Corp, which manages the nation's US$200 billion sovereign wealth fund, said last month that it may get more of the nation's reserves to invest to improve returns.

'The world's currency structure has changed; the dollar is losing its status as the world currency,' Mr Xu from the People's Bank of China said at the conference.

Mr Cheng, speaking to reporters after his speech, said that his comments do not mean that China will buy more euros.

Gains in the euro may be limited by speculation that European economic growth may slow, reducing the need for higher interest rates. Europe's single currency will trade at US$1.43 versus the US dollar by year-end, according to the median forecast of 42 analysts and brokerages surveyed by Bloomberg News.

The US dollar's decline helped to drive the price of crude oil to a record and gold to a 27-year high, encouraging investors to buy assets in commodity- producing nations. The US dollar's 9.8 per cent drop against the euro this year boosted the competitiveness of US exports, helping to shrink the nation's trade deficit to US$57.6 billion in August, the smallest since January.

Against the pound, the US dollar declined to US$2.0955, the lowest since May 1981. It fell to US$1.1010 per Canadian dollar. The currency slid against the Australian dollar to 93.89 US cents, the lowest since April 1984, from 92.87 US cents.

'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 US dollar also fell as losses from sub-prime mortgage defaults added to pressure on the Federal Reserve to lower its target for the overnight lending rate between banks to 4.25 per cent 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.' - Bloomberg