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Saturday, October 17, 2009

The Dollar Doldrums.

Although there does not seem to be any new unit yet central banks are diversifying into other existing currencies and no doubt a lot are buying gold as well. Gold is reaching new highs recently and shows no sign of going below the one thousand dollar mark in US funds. This is from Bloomberg. Or own Canadian dollar will soon be at par with the US and the New Zealand and Australian dollar are strong as well.

Dollar Reaches Breaking Point as Banks Shift Reserves
By Ye Xie and Anchalee Worrachate
Oct. 12 (Bloomberg) -- Central banks flush with record reserves areincreasingly snubbing dollars in favor of euros and yen, further pressuringthe greenback after its biggest two- quarter rout in almost two decades.Policy makers boosted foreign currency holdings by $413 billion lastquarter, the most since at least 2003, to $7.3 trillion, according to datacompiled by Bloomberg. Nations reporting currency breakdowns put 63 percentof the new cash into euros and yen in April, May and June, the latestBarclays Capital data show. That’s the highest percentage in any quarterwith more than an $80 billion increase.World leaders are acting on threats to dump the dollar while the Obamaadministration shows a willingness to tolerate a weaker currency in aneffort to boost exports and the economy as long as it doesn’t drive away thenation’s creditors. The diversification signals that the currency won’trebound anytime soon after losing 10.3 percent on a trade-weighted basis thepast six months, the biggest drop since 1991.“Global central banks are getting more serious about diversification,whereas in the past they used to just talk about it,” said Steven Englander,a former Federal Reserve researcher who is now the chief U.S. currencystrategist at Barclays in New York. “It looks like they are really backingaway from the dollar.”Sliding ShareThe dollar’s 37 percent share of new reserves fell from about a 63 percentaverage since 1999. Englander concluded in a report that the trend“accelerated” in the third quarter. He said in an interview that “for thenext couple of months, the forces are still in place” for continueddiversification.America’s currency has been under siege as the Treasury sells a recordamount of debt to finance a budget deficit that totaled $1.4 trillion infiscal 2009 ended Sept. 30.Intercontinental Exchange Inc.’s Dollar Index, which tracks the currency’sperformance against the euro, yen, pound, Canadian dollar, Swiss franc andSwedish krona, fell to 75.77 last week, the lowest level since August 2008and down from the high this year of 89.624 on March 4. The index, at 76.104today, is within six points of its record low reached in March 2008.Foreign companies and officials are starting to say their economies aregetting hurt because of the dollar’s weakness.Toyota’s ‘Pain’Yukitoshi Funo, executive vice president of Toyota City, Japan-based ToyotaMotor Corp., the nation’s biggest automaker, called the yen’s strength“painful.” Fabrice Bregier, chief operating officer of Toulouse,France-based Airbus SAS, the world’s largest commercial planemaker, said onOct. 8 the euro’s 11 percent rise since April was “challenging.”The economies of both Japan and Europe depend on exports that get moreexpensive whenever the greenback slumps. European Central Bank PresidentJean-Claude Trichet said in Venice on Oct. 8 that U.S. policy makers’preference for a strong dollar is “extremely important in the presentcircumstances.”“Major reserve-currency issuing countries should take into account andbalance the implications of their monetary policies for both their owneconomies and the world economy with a view to upholding stability ofinternational financial markets,” China President Hu Jintao told the Groupof 20 leaders in Pittsburgh on Sept. 25, according to an English translationof his prepared remarks. China is America’s largest creditor.Dollar’s WeightingDeveloping countries have likely sold about $30 billion for euros, yen andother currencies each month since March, according to strategists at Bank ofAmerica-Merrill Lynch.That helped reduce the dollar’s weight at central banks that report currencyholdings to 62.8 percent as of June 30, the lowest on record, the latestInternational Monetary Fund data show. The quarter’s 2.2 percentage pointdecline was the biggest since falling 2.5 percentage points to 69.1 percentin the period ended June 30, 2002.“The diversification out of the dollar will accelerate,” said FabrizioFiorini, a money manager who helps oversee $12 billion at Aletti GestielleSGR SpA in Milan. “People are buying the euro not because they want thatcurrency, but because they want to get rid of the dollar. In the long run,the U.S. will not be the same powerful country that it once was.”Central banks’ moves away from the dollar are a temporary trend that willreverse once the Fed starts raising interest rates from near zero, accordingto Christoph Kind, who helps manage $20 billion as head of asset allocationat Frankfurt Trust in Germany.‘Flush’ With Dollars“The world is currently flush with the U.S. dollar, which is available at nocost,” Kind said. “If there’s a turnaround in U.S. monetary policy, therewill be a change of perception about the dollar as a reserve currency. Thediversification has more to do with reduction of concentration risks ratherthan a dim view of the U.S. or its currency.”The median forecast in a Bloomberg survey of 54 economists is for the Fed tolift its target rate for overnight loans between banks to 1.25 percent bythe end of 2010. The European Central Bank will boost its benchmark a halfpercentage point to 1.5 percent, a separate poll shows.America’s economy will grow 2.4 percent in 2010, compared with 0.95 percentin the euro-zone, and 1 percent in Japan, median predictions show. Japan isseen keeping its rate at 0.1 percent through 2010.Central bank diversification is helping push the relative worth of the euroand the yen above what differences in interest rates, cost of living andother data indicate they should be. The euro is 16 percent more expensivethan its fair value of $1.22, according to economic models used by CreditSuisse Group AG. Morgan Stanley says the yen is 10 percent overvalued.Reminders of 1995Sentiment toward the dollar reminds John Taylor, chairman of New York-basedFX Concepts Inc., the world’s largest currency hedge fund, of the mid-1990s.That’s when the greenback tumbled to a post-World War II low of 79.75against the yen on April 19, 1995, on concern that the Fed wasn’t raisingrates fast enough to contain inflation. Like now, speculation about centralbank diversification and the demise of the dollar’s primacy rose.The currency then gained 26 percent versus the yen and 25 percent againstthe deutsche mark in the following two years as technology innovationincreased U.S. productivity and attracted foreign capital.“People didn’t like the dollar in 1995,” said Taylor, whose firm has $9billion under management. “That was very stupid and turned out to be wrong.Now, we are getting to the point that people’s attitude toward the dollarbecomes ridiculously negative.”Dollar ForecastsThe median estimate of more than 40 economists and strategists is for thedollar to end the year little changed at $1.47 per euro, and appreciate to92 yen, from 89.97 today.Englander at London-based Barclays, the world’s third- largestforeign-exchange trader, predicts the U.S. currency will weaken 3.3 percentagainst the euro to $1.52 in three months. He advised in March, when thedollar peaked this year, to sell the currency. Standard Chartered, the mostaccurate dollar-euro forecaster in Bloomberg surveys for the six quartersthat ended June 30, sees the greenback declining to $1.55 by year-end.The dollar’s reduced share of new reserves is also a reflection of U.S.assets’ lagging performance as the country struggles to recover from theworst recession since World War II.Lagging BehindSince Jan. 1, 61 of 82 country equity indexes tracked by Bloomberg haveoutperformed the Standard & Poor’s 500 Index of U.S. stocks, which hasgained 18.6 percent. That compares with 70.6 percent for Brazil’s BovespaStock Index and 49.4 percent for Hong Kong’s Hang Seng Index.Treasuries have lost 2.4 percent, after reinvested interest, versus a returnof 27.4 percent in emerging economies’ dollar- denominated bonds, MerrillLynch & Co. indexes show.The growth of global reserves is accelerating, with Taiwan’s and South Korea’s,the fifth- and sixth-largest in the world, rising 2.1 percent to $332.2billion and 3.6 percent to $254.3 billion in September, the fastest sinceMay. The four biggest pools of reserves are held by China, Japan, Russia andIndia.China, which controlled $2.1 trillion in foreign reserves as of June 30 andowns $800 billion of U.S. debt, is among the countries that don’t reportallocations.“Unless you think China does things significantly differently from others,”the anti-dollar trend is unmistakable, Englander said.Follow the MoneyEnglander’s conclusions are based on IMF data from central banks that reporttheir currency allocations, which account for 63 percent of total globalreserves. Barclays adjusted the IMF data for changes in exchange rates afterthe reserves were amassed to get an accurate snapshot of allocations at thetime they were acquired.Investors can make money by following central banks’ moves, according toBarclays, which created a trading model that flashes signals to buy or sellthe dollar based on global reserve shifts and other variables. Each tradetriggered by the system has average returns of more than 1 percent.Bill Gross, who runs the $186 billion Pimco Total Return Fund, the world’slargest bond fund, said in June that dollar investors should diversifybefore central banks do the same on concern that the U.S.’s budget deficitwill deepen.“The world is changing, and the dollar is losing its status,” said AlettiGestielle’s Fiorini. “If you have a 5- year or 10-year view about thedollar, it should be for a weaker currency.”

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