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Dollar falls to record on china plans to diversity Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=20601087&sid=aigTgE2c7qlI&refer=homehttp://www.bloomberg.com/apps/news?pid=20601087&sid=aigTgE2c7qlI&refer=home
Dollar Falls to Record on China's Plans to Diversify Reserves
By Min Zeng and Agnes Lovasz
Nov. 7 (Bloomberg) -- The dollar fell to a record versus the euro and the weakest since 1981 against the pound after Chinese officials signaled plans to diversify the nation's $1.43 trillion of foreign exchange reserves.
The U.S. dollar also declined to the lowest versus the Canadian dollar since the end of a fixed exchange rate in 1950 and a 23-year low against the Australian dollar. The New York Board of Trade's dollar index dropped to 75.077, the lowest since the gauge started in March 1973.
``The dollar is suffering a confidence crisis,'' said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon in New York, the world's largest custodian bank with more than $20 trillion in assets under administration. ``The dollar is on the ropes. Comments from China about diversification and surging oil prices pushed the dollar to new lows.''
The U.S. currency fell 0.7 percent to $1.4663 per euro at 11 a.m. in New York and touched $1.4731, the lowest since the 13-nation currency started trading in January 1999. The dollar weakened 1.3 percent, the most since Sept. 7, to 113.25 yen. The yen rose 0.6 percent against the euro to 166.07 as declines in U.S. and European stocks prompted investors to trim higher- yielding investments funded by loans in Japan.
The dollar will weaken to $1.54 per euro by the end of June, according to Woolfolk.
The dollar also fell to an all-time low against the synthetic euro, a theoretical value that estimates where the currency would have traded before its inception. The prior record was $1.4557 set in 1992. The dollar touched 1.1258 versus the Swiss franc, the weakest since 1995. The Chinese yuan rose to the highest since a dollar link was scrapped in July 2005.
`Losing Its Status'
The dollar is ``losing its status as the world currency,'' Xu Jian, a central bank vice director, told a conference in Beijing. ``We will favor stronger currencies over weaker ones, and will readjust accordingly,'' Cheng Siwei, vice chairman of China's National People's Congress, said at the same meeting.
Chinese investors have reduced their holdings of U.S. Treasuries by 5 percent to $400 billion in the five months to August. China Investment Corp., which manages the nation's $200 billion sovereign wealth fund, said last month it may get more of the nation's reserves to invest to improve returns.
`Feeds Those Fears'
``The big issue on any currency is if its rate of depreciation is so fast that it scares away all capital, and the announcement that we heard from China sort of feeds those fears,'' said Larry Smith, who manages $400 million as chief investment officer at Third Wave Global Investors.
International investors sold a record amount of U.S. securities in August as soaring credit costs sparked an exodus from the stock market. Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.5 billion in July, the Treasury Department said in Washington on Oct. 16.
The euro's break of the synthetic high set in 1992 cleared a ``strong resistance,'' which could allow the currency to rise at a faster pace unless there are comments from European nations against its advance, said Woolfolk.
``There are no real levels left,'' said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. ``Trying to find one is a fools' game now. I guess psychologically $1.50 is the only major level. But this last wave higher has been so fast that it's hard to have any levels in mind.''
Oil, Gold
The dollar's decline helped drive the price of crude oil to a record $98.62 a barrel and gold to a 27-year high, encouraging investors to buy assets in commodity-producing nations.
The Canadian dollar advanced to as high as $1.1040. The Australian dollar touched 93.98 U.S. cents, the highest since 1984, from 92.88 U.S. cents yesterday. The rand rose to as high as 6.4294 per dollar, the highest since May 2006, while Norway's krone touched the strongest since 1981.
The dollar's 10.1 percent drop against the euro this year boosted the competitiveness of U.S. exports, helping shrink the nation's trade deficit to $57.6 billion in August, the smallest since January.
``Further weakening of the dollar is very likely,'' said Teis Knuthsen, the Copenhagen-based head of foreign-exchange, fixed-income and derivative research at Danske Bank A/S, the Nordic region's second-biggest lender. China may ``diversify out of dollar holdings.''
Treasuries, Yen
U.S. 10-year Treasury notes rose today as mounting credit- market losses and declines in stocks pushed investors to the safety of government debt. The yen gained against all 16 most- actively traded currencies. The Standard & Poor's 500 Index lost 1.2 percent.
``The world's currency structure has changed,'' Xu said at the conference in Beijing. Cheng, speaking to reporters after his speech, said his comments don't mean China will buy more euros. The National People's Congress, China's legislature, isn't involved in setting currency policy.
The European Central Bank will keep its key rate at 4 percent tomorrow, while the Bank of England may hold borrowing costs at 5.75 percent, according to surveys from Bloomberg News. The Federal Reserve cut its rate to 4.5 percent last week, the second reduction since September, and interest-rate futures show 60 percent odds the central bank will cut again in December.
The yield advantage of two-year German bunds over comparable-maturity Treasuries increased to 0.28 percentage point, the widest since April 2004. A widening spread boosts the allure of European debt relative to that in the U.S.
Europe's single currency will trade at $1.43 versus the dollar by year-end, according to the median forecast of 42 analysts and brokerages surveyed by Bloomberg News.
Last Updated: November 7, 2007 11:00 EST
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