Chinese Now Support US Dollar As Reserve Currency...
Two interesting articles on the US Dollar, it's reserve status and what really moves the Dollar.
ft.com
US dollar backed as reserve currency
By Lionel Barber, Martin Wolf and Jamil Anderlini in London and Kathrin Hille in Beijing
Published: June 1 2009 19:58 | Last updated: June 1 2009 19:58
A leading Chinese financial official on Monday rejected suggestions the US dollar could be replaced quickly as the global reserve currency, as US Treasury secretary Tim Geithner arrived in China on his first official visit.
“In the short term I don’t think we can find another currency to replace the US dollar,” said Guo Shuqing, chairman of China Construction Bank and former head of the country’s foreign exchange administrator. “The US dollar is the main currency because their economy is number one in terms of competitiveness, in terms of innovation.” Speaking in an interview with the Financial Times, Mr Guo also raised doubts about a proposal from China’s central bank governor, Zhou Xiaochuan, to replace the dollar with a “super-sovereign reserve currency” based on special drawing rights issued by the International Monetary Fund.
“We’ve had SDRs for many years but everybody knows they don’t work so well,” said Mr Guo. “People worry about US dollars very much because of the imbalances in the current account but that has been the case for many years – they have had a deficit in the current account since the very beginning of the 1970s.”
The bulk of China’s total international investment position is held in US dollar assets and only 6 per cent is in the form of direct investment.
Fears that US moves to tackle the recession could undermine the value of the dollar have led to calls from senior Chinese officials, including Mr Zhou, for more conservative fiscal policy and suggestions that the dollar be replaced as the world’s reserve currency.
On his arrival in Beijing on Monday, Mr Geithner called for China to make its currency more flexible in return for fiscal reforms on the part of the US.
In remarks to an audience at Peking University that set the tone for two days of talks with Chinese leaders, Mr Geithner reiterated President Barack Obama’s pledge to lower the US fiscal deficit to about 3 per cent of GDP once the economy was on a stable recovery path.
But Mr Geithner also named a long list of tasks the Chinese government had to address to make its contribution to a more balanced global economy.
These included expanding its social safety net, spending more on education and encouraging changes in industry structure through market mechanisms.
China has in the past protested when the US put it under pressure to allow its currency to appreciate.
The US dollar fell to its lowest since mid-December on Monday against a basket of currencies and against the euro.
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ft.com
US dollar
Published: June 1 2009 12:11
Investors may worship money but their love of the world’s reserve currency is ever more fickle. A couple of years ago, the dollar’s pre-eminence came into question, with supermodels refusing to get out of bed for anything other than euros. With the credit crunch, investors fled back to dollars. Today, the dollar is once again increasingly spurned.
In the short term, the dollar looks to be trading as a safe-haven asset. Take the risk premium investors have demanded for holding dollar assets since the beginning of 1999. Looking at the dollar versus the euro, Barclays Capital defines this excess return as the interest rate differential between the US and the eurozone consistent with investors being indifferent between dollars and euros. In times of crisis a lower premium is required to own dollars, whereas in calmer periods, around 2006 say, investors demand an excess return of up to 100 basis points.
That suggests a weaker dollar if and when the economic crisis abates. Indeed, just as optimism has grown since stock markets troughed in March, so has the trade-weighted dollar fallen by 11 per cent. Of course, things could turn for the worse again. That would support the dollar, although trading could be choppy depending on actions by the Federal Reserve, particularly regarding quantitative easing.
Longer term, however, it will be a combination of US fiscal and monetary policy that determines the fate of the dollar. Usually, a strong dollar has coincided with relatively stronger government finances versus eurozone economies or relatively tighter monetary policy, or both. But there’s the rub. The US will have low rates and a terrible fiscal position for years. Yet so will everywhere else. Investors may have to love the dollar a while longer.
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Interesting flip flop by the Chinese. Maybe they realized
they shot their own book in the foot with earlier comments
calling for a new reserve currency, triggering a dollar
sell off?
SOTB |
