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Global Voices Try to ‘Talk Up’ the Falling Dollar

By    |   Thursday, 28 April 2011 07:04 AM

Treasury Secretary Tim Geithner recently said at the Council on Foreign Relations in New York that the idea of the U.S. government defaulting on its debt was “ridiculous.”

On the dollar, he commented: “Our policy has been and will always be, as long as at least I'm in this job, that a strong dollar is in our interest as a country … We will never embrace a strategy of trying to weaken our currency to try to gain economic advantage.”

Interestingly, European Central Bank (ECB) Governor Jean-Claude Trichet said he shares the view that a strong dollar is in the interest of the U.S.

Yes, it seems that once again a new period of talking up the dollar could be taking hold.

Investors also know that fighting developing inflation with a weak dollar isn’t possible. As far as I’m concerned, I don’t expect the dollar to fall off a cliff, at least not for now. In my opinion, that’s a doomsday scenario for later… once there is a credible alternative world-reserve-currency at hand. The only thing that’s for sure now is that the world doesn’t have a credible, ready alternative to the dollar as a worldwide reserve currency...

That said, in a recent front-page editorial of the Mandarin edition of the China Securities Journal, Zongzheng Wang gives us interesting remarks from a Chinese standpoint, in his article titled: “3 trillion foreign exchange reserves and the urgent need for de-dollarization.”

Today, China's foreign-exchange reserves exceed the equivalent of $3 trillion, which is about half of China’s 2010 total GDP. The management of such an amount has become a major challenge to the Chinese authorities, especially when taken in the context of an indisputable growing risk that implies the dollar by itself.

China’s U.S. dollar assets generally show declining incomes, and nobody should be happy with that. Trying to “de-dollarize” Chinese foreign-exchange reserves by buying up precious metals, crude oil and other commodities as well as other tangible assets have helped, if not caused their prices to rise rapidly.

And yes, the Chinese admit that the “liquidity” of these assets is limited, and represent a higher investment risk than U.S. Treasurys, notwithstanding the actual ultra-low U.S. interest rates coupled with two rounds of quantitative easing.

No doubt, because of the size of the Chinese foreign-exchange reserves they are doomed whenever they start buying into a market — and by just doing that cause distortion of market prices, which doesn’t help anybody over the longer term.

The Chinese Exchange Stabilization Fund will become more operational than we have seen so far. Yes, we can expect they will intervene in the currency markets as in fact do all other important central banks. It could be stated that we’re seeing the beginning of a real convertible Chinese currency “in the making.”

How long that will take, nobody knows. It will take some time, that’s for sure. They have started to “de-dollarize” at a very slow pace, but they won’t do foolish things and surely won’t throw out the baby, which is U.S. dollar, out with the bath water. No, they won’t dump the dollar. At least, that’s my opinion.

Let’s wait and see if I’m right…

Sun Lujun, director general of the capital department of the State Administration of Foreign Exchange, just stated that China now has a stronger ability to cope with foreign-exchange risks despite its massive buildup of foreign reserves. He said that China's economic development has reached a stage where it's no longer necessary to maintain the old policy that encouraged foreign capital inflows but restricted fund outflows.

He also says that China aims to gradually ease capital controls and promote the Chinese currency (renminbi/yuan) convertibility.

Investors should not overlook that China faces, certainly under the actual circumstances, a shortage of foreign-exchange reserves that are fully compatible with a “complete” operational foreign-exchange management system and that implies and complies with the establishment of a real “free” convergence of the Chinese currency.

All that said, I would shy buying the Chinese currency and there are lot of safe ways for doing that. Of course, it’s everybody’s choice and investors that are interested should ask for professional advice as always.

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Treasury Secretary Tim Geithner recently said at the Council on Foreign Relations in New York that the idea of the U.S. government defaulting on its debt was ridiculous. On the dollar, he commented: Our policy has been and will always be, as long as at least I'm in this...
Thursday, 28 April 2011 07:04 AM
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