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U.S. dollar starts the big slide against major currencies

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  • #46
    NEW YORK (Reuters) - Benchmark U.S. Treasuries surged on Thursday while the dollar and U.S. stocks declined as investors bet that U.S. interest rates won't rise anytime soon after data showed the Mid-Atlantic regional economy slowed in September.

    The Federal Reserve Bank of Philadelphia said its business activity index slid to -0.4 in September from 18.5 in August - the first reading below zero since April 2003 and indicating a retrenchment in regional manufacturing.

    The figure confounded economists' forecasts for moderating growth with a reading of 14.8.

    Bond prices shot higher after the Philly Fed's noon report also said the region's six-month business outlook fell below zero for the first time since January 2001 - just before the last U.S. recession.

    "Bond investors are pleased that inflationary pressures are starting to subside. It looks like the Fed will probably hold rates steady for the foreseeable future and could perhaps cut interest rates early next year," said Gary Thayer, chief economist at A.G. Edwards and Sons in St. Louis, Missouri.

    The yield on the benchmark 10-year U.S. Treasury note US10YT=RR hit a six-month low of 4.64 percent after the Philly Fed data, compared with 4.74 percent late on Wednesday. Its price, which moves inversely to its yield, rose 23/32 to 101-23/32.

    The Dow Jones industrial average .DJI> was down 79.96 points, or 0.69 percent, at 11,533.23. The Standard & Poor's 500 Index .SPX> was down 7.15 points, or 0.54 percent, at 1,318.03. The Nasdaq Composite Index .IXIC> was down 15.14 points, or 0.67 percent, at 2,237.75.

    Big industrial stocks like heavy-equipment maker Caterpillar and diversified manufacturer United Technologies were some of the biggest drags on the Dow, as the Philly Fed survey spurred concern on the outlook for economic growth and corporate profits.

    Meanwhile, the dollar extended earlier losses after the Philly Fed's report increased the perception that the Federal Reserve will leave interest rates on hold.

    The weekly report on U.S. initial claims for unemployment benefits, released before the opening bell, did little to change Wall Street's view that interest rates will stay on hold for now - a day after the Federal Reserve decided to keep interest rates steady for the second straight month.

    On Wednesday, the Fed's policy-makers voted to keep the target fed funds rate at 5.25 percent, where it has held since June after increases at 17 consecutive meetings in two years.

    In New York, U.S. crude oil futures rose, helped by a technical rebound, a day after dropping to a six-month low amid brimming domestic fuel supplies.

    Drugstore stocks were pummelled on Thursday, dragging down the S&P 500 from the five-year intraday high reached on Wednesday, after retail giant Wal-Mart Stores Inc. said it was slashing prices of generic drugs, beginning in Florida and with plans to expand to other states next year.

    Shares of No. 2 U.S. drugstore CVS and No. 1 Walgreen were the biggest percentage decliners on the S&P 500, down 8.4 percent and 7.4 percent, respectively.

    Meanwhile, in Asia, Japan's Nikkei average gained 0.74 percent, or 115.56 points, to end at 15,834.23, recovering from Wednesday's five-week closing low, partly due to easing concerns about a U.S. slowdown.

    In Europe, stocks closed at their highest level in more than four months, driven by heavy merger activity and much cheaper oil prices. The pan-European FTSEurofirst 300 index .FTEU3> rose 0.4 percent to end at 1,386.58.

    U.S. Treasury debt prices rose to their highest levels in six months as investors warmed to the view that interest rates will remain steady this year before falling in 2007.

    The two-year note US2YT=RR rose 4/32 to 100-7/32, while its yield fell to 4.75 percent, after sliding to 4.737 percent after the Philly Fed data, compared with 4.82 percent late on Wednesday. The 30-year bond US30YT=RR jumped 30/32 to 95-15/32, yielding 4.79 percent, down from 4.85 percent the previous day.

    On the currency front, the dollar fell as investors priced in steady U.S. interest rates for the rest of 2006 and possible lower rates next year. The greenback registered its third straight day of losses against the yen.

    The euro EUR=> shot up 0.8 percent to $1.2788 from $1.2685 late on Wednesday. Against the yen, the dollar fell 0.91 percent to 116.29 yen JPY=> from 117.38 on Wednesday.

    On the New York Mercantile Exchange, November crude CLX6> settled 85 cents higher at $61.59 per barrel. October crude expired Wednesday after bottoming in late electronic trading at $59.80, the lowest price since March 21.

    In London, ICE November Brent LCOX6> rose 87 cents higher at $61.34.

    COMEX gold for December delivery GCZ6> rose $2.10 to $588.30 an ounce, reversing the morning's decline on support from the dollar's weakness and a rebound in oil prices.

    U.S. dollar and stocks fall


    • #47
      China and India will be calling the shots when the U.S. is no longer top dollar

      It's 2056. After a coup in Saudi Arabia, the new government announces it is cutting off supplies of its dwindling stock of oil to the United States. The White House responds by sending in the troops, but is forced to withdraw after Beijing says it will only continue shoring up the dollar if the military action is called off.

      Marking the 100th anniversary of Suez, the Americans have no choice but to comply. Fanciful? Ludicrous? Certainly, that would have been the reaction of the traders on Wall Street who last week sent the Dow Jones industrial average to within a whisker of its all-time high. But even if the US can avoid a hard landing in the short term, as equity dealers believe it can, the medium and long-term risks to the economy remain.

      Optimism seems to be inspired by falling oil prices and the expectation that the next move in interest rates from the Federal Reserve will be down. It is an optimism not shared by the bond market, which is sending out clear warnings of impending recession. It is possible those who have pushed the Dow back well over 11,000 points have got it right. Many economists believe, however, that the equity market has got it wrong. They can hear the sound of fluttering wings as the chickens come home to roost.

      Stephen King, chief economist at HSBC, has downgraded his forecast of US growth next year to 1.9%, and believes that by the end of 2007 the economy will be expanding at only just over 1% a year. That, by US standards, is very slow growth and would certainly lead to a sharp jump in unemployment. The Fed would be cutting rates by this time next year in an attempt to get the economy going again. It may not be that simple. For one thing, the downturn in the housing market looks like it has a lot further to run. Activity and prices may continue falling for another year, and with US consumers already drowning in a sea of debt it's not obvious that they will be prepared to load up on any extra borrowing, whatever the level of interest rates. And the wisdom of curing the hangover from one bubble by another binge has to be questioned.

      Consumers have been using their homes like ATMs - borrowing against rising prices - but this cannot go on forever. The US economy needs quite a prolonged period in which consumer spending grows more slowly than the economy: that is the only way that the trade deficit is going to be reduced. There are those who say that the trade deficit is not a problem for the US. They argue that it is perfectly sustainable to run sizeable deficits in perpetuity because the dollar's status as a reserve currency means that there will always be demand for US assets. But there are two points here. First, running a permanent trade deficit affects the structure of your economy. It means fewer manufacturing jobs where productivity tends to be higher and more jobs in the service sector, where productivity tends to be lower.

      The US has struck a Faustian bargain with its trading partners, particularly China, responsible for about one third of the $700bn-plus trade total last year. As the American economist Tom Palley puts it: "US consumers get lots of cheap goods in return for which they give over paper IOUs that cost less to print. Meanwhile, China creates millions of jobs and builds modern factories that are transforming it into an industrial superpower, and it also accumulates billions of dollars in financial claims against the US. From this perspective, trade deficits don't matter because there are no limits to either government or private borrowing, and because manufacturing doesn't matter either." The logic of this, Palley notes drily, is that the US would benefit even further if China devalued its exchange rate and ran a larger trade surplus. The second point is potentially much more explosive: it is the one sketched out in the crystal ball gazing at the top of this piece. What would happen if, as a result of global developments over the coming decades, the dollar ceased to be the reserve currency of choice. This was a point raised by Avinash Persaud, one of the financial sector's more original thinkers, in a recent lecture in New York. Persaud's argument is as follows.

      Throughout history, there has always tended to be one dominant reserve currency along with a host of lesser rivals. In the 19th century Britain was the pre-eminent economy and sterling was the main reserve currency. Yet currencies don't retain their dominance forever; part of Britain's problem at the time of Suez was that it was struggling to adjust to a world in which it was no longer the top-dog currency but the creditors came knocking at the door asking for their cheques to be cashed. The US is living beyond its means, hoping that nobody cashes the cheques it has been merrily writing as the current account has gone deeper into the red. That's the advantage of being a reserve currency, even though, as Persaud notes, there is no rule which says that you have to run current account deficits simply because you are a reserve currency.

      Britain didn't a century ago. In the decade or so up to the first world war it had a trade surplus of 5% of GDP. "That is a mirror image of the US today. The UK was in surplus by as much as the US is in deficit." That deficit has enabled the Chinese to build up their industrial strength at a rapid rate, so much so that it is probable that China - and perhaps India - will have overtaken the US as the world's largest economy (on a purchasing power parity basis, at least) by 2050. Persaud thinks that the upshot of this will be that in the next few decades the dollar will start to lose its reserve status just as sterling did in the last century. "In the case of sterling's loss of reserve status, world war one and two accelerated a process that had begun more slowly before and ended abruptly with debt and inflation."

      Today the process is also being accelerated - by wars where the end is as elusive as the enemy and by a consumerism built on a property bubble. Perhaps we will not have to wait until 2050. In my lifetime, the dollar will start to lose its reserve currency status, not to the euro but to the renminbi or the rupee. This would clearly have massive economic and geopolitical consequences. As Persaud rightly says: "If it was economically and politically painful for the UK, even though its international financial position did not begin from a position of heavy deficit, what will it be like for the US which has become the world's largest debtor. There will be an avalanche of cheques coming home to be paid when the dollar begins to lose its status."

      And this "avalanche of cheques" is likely to make for the most horrendous geo-political tension. The idea that the US will give up global financial hegemony without a fight seems fanciful in the extreme.

      America is living beyond its means


      • #48
        Australian treasurer Peter Costello has called on East Asia's central bankers to "telegraph" their intentions to diversify out of American investments and ensure an orderly adjustment.

        Central banks in China, Japan, Taiwan, South Korea and Hong Kong have channelled immense foreign reserves into American government bonds, helping to prop up the US dollar and hold down American interest rates.

        Mr Costello said "the strategy had changed" and Chinese central bankers were now looking for alternative investments.

        "Of course you can have an orderly adjustment," he told reporters. "And what I would recommend is that these matters be telegraphed well in advance. I think we should begin preparing ourselves for it."

        Mr Costello said the "re-emergence" of China as the world's greatest economy "is not something to be feared".

        Asked if a muscular China would be a force for good, however, Mr Costello said it would be good for growth and stability. "With the growing economic strength you will see growing influence in diplomacy in the regional architecture, as you would expect.

        "I am sure it will be a force for economic development and I am sure that in partnership with other global powers, China wants to see a stable East Asian region."

        Earlier, in a speech to open the Australian National University's East Asian Bureau of Economic Research, Mr Costello said Australia's involvement in the region was broader than economics.

        "It is a key ingredient of who we are as a people," he said. "While Australia has its own unique culture, we are also a people who confidently enjoy the cultures of Asia, with seven of our top 10 overseas travel destinations being in the region."

        Ahead of next month's G20 meeting in Melbourne, Mr Costello called on regional leaders to reform their anachronistic financial systems.

        He said underdeveloped financial markets were to blame for the emerging economies of East Asia sending 94 per cent of outward portfolio investment to "ageing" countries outside the region.

        He said the region needed to improve poor macroeconomic frameworks, inadequate regulatory systems, uncompetitive markets and insufficient investment in health and education.

        Australian treasurer seeks orderly withdrawal from U.S. dollar


        • #49
          A noted Chinese theorist on modern warfare, Chang Mengxiong, compared China's form of fighting to "a Chinese boxer with a keen knowledge of vital body points who can bring an opponent to his knees with a minimum of movements". It is like key acupuncture points in ancient Chinese medicine. Puncture one vital point and the whole anatomy is affected. If America ever goes to war with China, say, over Taiwan, then America should be prepared for the following "acupuncture points" in its anatomy to be "punctured". Each of the vital points can bring America to its knees with a minimum of effort:

          Striking the U.S. where it hurts


          • #50
            The dirty little secret everyone in Washington knows, or at least should:

            AUSTIN, Texas - David Walker sure talks like he's running for office.

            "This is about the future of our country, our kids and grandkids," the comptroller general of the United States warns a packed hall at Austin's historic Driskill Hotel. "We the people have to rise up to make sure things get changed."

            But Walker doesn't want, or need, your vote this November. He already has a job as head of the Government Accountability Office, an investigative arm of Congress that audits and evaluates the performance of the federal government.

            Basically, that makes Walker the nation's accountant-in-chief. And the accountant-in-chief's professional opinion is that the American public needs to tell Washington it's time to steer the nation off the path to financial ruin.

            From the hustings and the airwaves this campaign season, America's political class can be heard debating Capitol Hill sex scandals, the wisdom of the war in Iraq and which party is tougher on terror. Democrats and Republicans talk of cutting taxes to make life easier for the American people.

            What they don't talk about is a dirty little secret everyone in Washington knows, or at least should. The vast majority of economists and budget analysts agree: The ship of state is on a disastrous course, and will founder on the reefs of economic disaster if nothing is done to correct it.

            There's a good reason politicians don't like to talk about the nation's long-term fiscal prospects. The subject is short on political theatrics and long on complicated economics, scary graphs and very big numbers. It reveals serious problems and offers no easy solutions. Anybody who wanted to deal with it seriously would have to talk about raising taxes and cutting benefits, nasty nostrums that might doom any candidate who prescribed them.

            "There's no sexiness to it," laments Leita Hart-Fanta, an accountant who has just heard Walker's pitch. She suggests recruiting a trusted celebrity - maybe Oprah - to sell fiscal responsibility to the American people.

            Walker doesn't want to make balancing the federal government's books sexy - he just wants to make it politically palatable. He has committed to touring the nation through the 2008 elections, talking to anybody who will listen about the fiscal black hole Washington has dug itself, the "demographic tsunami" that will come when the baby boom generation begins retiring and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government.

            He's dubbed his campaign the fiscal wake-up tour.

            To show that the looming fiscal crisis is not a partisan issue, he brings along economists and budget analysts from across the political spectrum. In Austin, he's accompanied by Diane Lim Rogers, a liberal economist from the Brookings Institution, and Alison Acosta Fraser, director of the Roe Institute for Economic Policy Studies at the Heritage Foundation, a conservative think tank.

            Their basic message is this: If the United States government conducts business as usual over the next few decades, a national debt that is already $8.5 trillion could reach $46 trillion or more, adjusted for inflation.

            A hole that big could paralyze the U.S. economy; according to some projections, just the interest payments on a debt that big would be as much as all the taxes the government collects today.

            And every year that nothing is done about it, Walker says, the problem grows by $2 trillion to $3 trillion.

            People who remember Ross Perot's rants in the 1992 presidential election may think of the federal debt as a problem of the past. But it never really went away after Perot made it an issue, it only took a breather. The federal government actually produced a surplus for a few years during the 1990s, thanks to a booming economy and fiscal restraint imposed by laws that were passed early in the decade. And though the federal debt has grown in dollar terms since 2001, it hasn't grown dramatically relative to the size of the economy.

            But that's about to change, thanks to the country's three big entitlement programs - Social Security, Medicaid and especially Medicare. Medicaid and Medicare have grown progressively more expensive as the cost of health care has dramatically outpaced inflation over the past 30 years, a trend that is expected to continue for at least another decade or two.

            And with the first baby boomers becoming eligible for Social Security in 2008 and for Medicare in 2011, the expenses of those two programs are about to increase dramatically due to demographic pressures. People are also living longer, which makes any program that provides benefits to retirees more expensive.

            Medicare already costs four times as much as it did in 1970, measured as a percentage of the nation's gross domestic product. It currently comprises 13 percent of federal spending; by 2030, the Congressional Budget Office projects it will consume nearly a quarter of the budget.

            Economists Jagadeesh Gokhale of the American Enterprise Institute and Kent Smetters of the University of Pennsylvania estimate that by 2030 Medicare will be about $5 trillion in the hole, measured in 2004 dollars. By 2080, the fiscal imbalance will have risen to $25 trillion. And when you project the gap out to an infinite time horizon, it reaches $60 trillion.

            Medicare so dominates the nation's fiscal future that some economists believe health care reform, rather than budget measures, is the best way to attack the problem.

            "Obviously health care is a mess," says Dean Baker, a liberal economist at the Center for Economic and Policy Research, a Washington think tank. "No one's been willing to touch it, but that's what I see as front and center."

            Social Security is a much less serious problem. The program currently pays for itself with a 12.4 percent payroll tax, and even produces a surplus that the government raids every year to pay other bills. But Social Security will begin to run deficits during the next century, and ultimately would need an infusion of $8 trillion if the government planned to keep its promises to every beneficiary.

            Why is America so fiscally unprepared for the next century? Like many of its citizens, the United States has spent the last few years racking up debt instead of saving for the future. Foreign lenders - primarily the central banks of China, Japan and other big U.S. trading partners - have been eager to lend the government money at low interest rates, making the current $8.5-trillion deficit about as painful as a big balance on a zero-percent credit card.

            In her part of the fiscal wake-up tour presentation, Rogers tries to explain why that's a bad thing. For one thing, even when rates are low a bigger deficit means a greater portion of each tax dollar goes to interest payments rather than useful programs. And because foreigners now hold so much of the federal government's debt, those interest payments increasingly go overseas rather than to U.S. investors.

            More serious is the possibility that foreign lenders might lose their enthusiasm for lending money to the United States. Because treasury bills are sold at auction, that would mean paying higher interest rates in the future. And it wouldn't just be the government's problem. All interest rates would rise, making mortgages, car payments and student loans costlier, too.

            A modest rise in interest rates wouldn't necessarily be a bad thing, Rogers said. America's consumers have as much of a borrowing problem as their government does, so higher rates could moderate overconsumption and encourage consumer saving. But a big jump in interest rates could cause economic catastrophe. Some economists even predict the government would resort to printing money to pay off its debt, a risky strategy that could lead to runaway inflation.

            Macroeconomic meltdown is probably preventable, says Anjan Thakor, a professor of finance at Washington University in St. Louis. But to keep it at bay, he said, the government is essentially going to have to renegotiate some of the promises it has made to its citizens, probably by some combination of tax increases and benefit cuts.

            But there's no way to avoid what Rogers considers the worst result of racking up a big deficit - the outrage of making our children and grandchildren repay the debts of their elders.

            Top accountant says U.S. faces financial ruin


            • #51
              Making short-term predictions about the US dollar is notoriously difficult. So why do we say the dollar may fall after Tuesday's mid-term elections in the United States? Once we know what the future composition of Congress will be, the markets can shift focus from the excitement of the moment to what may lie ahead.

              We believe we have just seen the beginning of a more pronounced slowdown that will likely push us into recession. The reason we are more negative than many economists is that high levels of consumer debt make the economy much more interest-rate-sensitive than in past economic cycles.

              An area where this is particularly apparent is in the housing market, as consumers in the US, a so-called ownership society, have massive levels of debt accumulated in their homes. Given that only short-term interest rates have risen, only the most speculative homeowners with adjustable rate mortgages should have been affected.

              But in a world where the speculators have driven up prices, the speculators are also dragging the entire market down with them as the housing bubble deflates. If and when long-term rates reflect that we may be heading into an inflationary or stagflationary environment, the fallout for the housing market could be severe, as higher long-term rates squeeze masses of homeowners who need to refinance their mortgages in the months and years ahead.
              For now, market commentators try to grab on to every bit of good news released. The "best" news seems to come from corporations that are involved in the option-backdating scandals: these companies do not report their balance sheets while they investigate their wrongdoings. Wall Street loves them, as revenue is the only reliable number released - and US executives have become experts at generating top-line growth.

              Indeed, in recent months, just about any piece of news has been interpreted as good news by the markets. Even in a perfect world, it is time to get very concerned about such exuberance. But the world is not perfect: when retail stores have same-store sales increases behind the rate of inflation, when hourly wages rise at a rate higher than economic growth, we have all the hallmarks of stagflation.

              Remember those who were touting to buy stocks at the top of the dot-com bubble? Remember those who said there was nothing to fear from the housing market only this year? These are the same pundits who called the top of the commodity boom this summer. It turns out that while the US economy is slowing down, oil is about 50% higher than two years ago, gold is again above US$600 an ounce, and base metals hover once again near their highs.

              Investors have been distracted from the big picture. And this is where the election may play a pivotal role. None of the challenges have gone away, but we now are faced with a US economy that may slide into recession. The best news about the new composition in Congress is likely to be that it will get less done, which means that politicians can spend less. But just as equity and bond markets have priced in perfection, investors have also given more confidence to the dollar than it may deserve. Then again, many investors are not aware of just how much the dollar has weakened.

              If you have managed to avoid the fall in the dollar, your purchasing power will be much stronger now. This year, the dollar has resumed its downward trend that was interrupted in 2005. As long as the US economy focuses on growth rather than savings and investments, this trend may continue.

              When we say the dollar may weaken after the election, we know as little as anyone what will happen to the dollar in the days that follow the election. But we believe that the focus will shift to what is ahead. Given that timing currency moves is extremely difficult, investors may want to consider taking a long-term approach by broadly diversifying into a basket of hard currencies, that is, those currencies backed by sound monetary policy.

              Dollar poised for a dip


              • #52
                The Democrats' victory in the U.S. mid-term elections could lead to policy changes resulting in a weaker dollar, intensifying trade disputes and lower U.S. consumer demand, a combination that could produce a sharp slowdown in Asia's export and economic growth next year:

                Democrats to tackle the dollar


                • #53
                  The pain of a weak U.S. dollar


                  • #54
                    The U.S. is beginning to unwind the largest housing bubble in modern history. There will be upswings and local exceptions and wide regional and price variations. This changes nothing. Hundreds of billions of dollars in household access to cash and debt from refinancing, equity extraction, home equity lines of credit and house flipping will dry up:

                    Hard U.S. lessons, harder landings


                    • #55
                      NEW YORK: Growing pessimism over the dollar facilitated a sell-off Friday that plunged the greenback to a 19-month low versus the euro and a nearly two-year low against the U.K. pound.

                      The session was thinly traded following Thursday's Thanksgiving holiday, which allowed speculative dollar-selling to affect currency levels more than it would in normal market conditions, analysts said.

                      At its peak Friday, the euro reached $1.3110, a level not seen since April 2005. The U.K. pound attained $1.9351, unseen since December 2004.

                      But even when corporate and institutional currency investors are back in the office Monday, the dollar's downward trend "is unlikely to end ... as the fundamentals and market flows are increasingly stacked up against the U.S. currency," said Ashraf Laidi, chief foreign exchange analyst at CMC Capital Markets.

                      Late Friday, the euro stood at $1.3100 from $1.2950 late Thursday, while the dollar was trading at 115.78 yen from Y116.20 late Thursday. The euro was at 151.63 yen from Y150.45 late Thursday. The dollar stood at 1.2093 Swiss francs from 1.2248 while the U.K. sterling was at $1.9333 from $1.9154 late Thursday.

                      The dollar's sharp fall was blamed for declines in other asset markets as equities closed lower in a shortened session. The Dow Jones Industrial Average, the Nasdaq Composite Index and the Standard & Poor's 500 Index all finished in negative territory Friday.

                      European stocks also dropped sharply Friday on the dollar's fall. The pan-European Dow Jones Stoxx 600 lost 1.1 percent at 354.72. Meanwhile, the dollar sell-off pushed gold and silver prices to multimonth highs.

                      What surprised some analysts was that the dollar's slide came without important economic data such as inflation or economic growth to act as catalysts for big swings in exchange rates.

                      "The trigger for the overnight (euro versus dollar) surge through $1.30 was not based on any data," noted Dustin Reid, currency strategist at ABN Amro in Chicago.

                      Instead, analysts had to go back a day to the Thursday release of a sometimes disregarded German IFO business confidence survey. The data came in well above expectations at a 15-year high, and was the likely spark for the euro rally against the dollar that snowballed Friday, they said.

                      A key to the market's readiness to go negative on the dollar is the growing belief that the Federal Reserve's next policy move will be an interest rate cut in an effort to spur economic growth.

                      Interest rate cuts by the Fed generally hurt the dollar as it is a clear sign that central bankers are worried about slow economic growth. It also can cause investors to shift their dollar-based assets into higher-yielding currencies.

                      The Fed's benchmark rate currently stands at 5.25 percent.

                      Meantime, the European Central Bank appears set to hike its key rate once again before the end of this year to stem inflation and excessive growth, which is also weighing on the dollar.

                      There is also mounting concerns that central banks around the globe might begin to aggressively diversify their foreign reserves into euros and away from dollars, the long-standing reserve currency of choice.

                      On Friday, China warned other countries that holding excessive dollar reserves may not be a good idea.

                      Wu Xiaoling, a senior People's Bank of China official, said Friday that continued weakness in the U.S. dollar poses a risk for East Asia's foreign-exchange reserves, Market News International reported.

                      One could argue that China, which itself holds a huge amount of dollar reserves, is shooting itself in the foot by saying this because of its dollar-negative effects.

                      But Chris Turner, head of foreign exchange research at ING Financial Markets, said the official's comments show that reserve diversification is "still is a theme in the market," and thus worked against the dollar.

                      Despite worries about diversification, most analysts believe that most central banks are only diversifying with new reserves. This opposed to selling held dollar reserves to replace them with euros or other currencies.

                      Turner said the dollar's dip Friday is likely to serve as a wake-up call for many corporate and institutional investors that he said have grown "complacent," assuming the dollar's value would remain steady.

                      The decline Friday, he said, demonstrates that "the dollar has some serious problems going into 2007," pointing to growing talk of diversification of reserves by central banks around the globe and the widening U.S. trade deficit.

                      Dollar plunges to 19-month low against euro


                      • #56
                        Death knell of the U.S. dollar...


                        • #57
                          Greenback is down about 50% vs. euro in past five years; down 6% vs. yen

                          Dollar woes poised to carry over into next year


                          • #58
                            "But the fact is that the sharp rise in the pound - up 14 per cent against the dollar this year - is not a vote of approval for the UK economy but a damning verdict on the outlook of the world's largest economy by experts in the financial markets."

                            Transatlantic travellers hoping to cash in on a $2 pound for the first time in 14 years should enjoy the good times while they last, because a tumbling dollar could start an economic whirlwind.

                            Sterling hit its highest level against the dollar since September 1992 for the second day in a row, with little sign of obstacles to the magic $2 level. At one point yesterday a pound was worth $1.9848 on the open market.

                            "Two dollars is a certainty," said Neil Mellor, a currency strategist at the Bank of New York office in London. He said the crucial test would be $2.002, its peak the pound reached on 9 September 1992 before its ejection from the exchange rate mechanism on Black Wednesday. "If it does, there's a possibility it would catapulted up and there's a lot of space for it to rise," he said.

                            Last Christmas, the pound was languishing at $1.80 so those iPods, Hugo Boss suits and Manolo Blahnik shoes will feel 10 per cent cheaper. Back in the UK shoppers might expect to see cheaper clothes and electronics goods as the prices of imports from the US and countries whose currencies are tied to the dollar, such as China, fall. Some companies too will benefit as they pay less for a host of raw materials including oil and wheat, which are priced in dollars.

                            But these short-term benefits - which will shared by UK - may well be outweighed by the short-term costs of strong pound - and the danger that the fall in the dollar could presage a major economic shock that would reverberate around the world.

                            Sterling's rally to 14-year highs against the US dollar is a significant threat to Britain's strong corporate earnings and economic growth rates, experts warn. Just as exports to the US and China are cheaper, so imports from the two industrial powerhouses will become more expensive.

                            "A strong exchange rate makes UK exports more expensive and UK firms could see sales into the dollar area negatively affected by the strength of the pound," said Chris Iggo, senior strategist at AXA Investment Managers.

                            The EEF, a manufacturing lobby group, warns that a sustained $2 pound will see a lot more companies suffering. The screw will be tightened further if the Bank of England raises interest rates again in February - its third in seven months - which support the pound and make borrowing more expensive.

                            But the fact is that the sharp rise in the pound - up 14 per cent against the dollar this year - is not a vote of approval for the UK economy but a damning verdict on the outlook of the world's largest economy by experts in the financial markets.

                            The dollar has been falling for much of this year but has taken a nosedive in the past few weeks, losing 4 per cent against the euro in the past month alone.

                            Experts have been warning that the US and the dollar have been living on borrowed time. Non-stop spending by US households has delivered a record trade and current account deficits. The dollar has held up because overseas investors, especially the Chinese and other Asians governments are keen to buy dollar assets.

                            But recent comments by the Chinese central bank about the need to move into other currencies helped trigger the start of the dollar's recent slump a week ago. Private investors have also be keen to buy into US Inc but the prospect of further falls in the dollar could encourage them to cash in their chips now, pushing the dollar down further and creating a vicious cycle.

                            In its most recent forecast the International Monetary Fund (IMF) warned that if that happened there would be a "disorderly unwinding" that would see a rapid fall in the dollar, volatile movements in the financial markets and a "significant hit" to the world economy. A weak dollar would put up the prices of imports, discouraging Americans from spending. It would ALSO drive up inflation and force the US Federal Reserve to raise interest rates. That could transform its stagnant housing market into a financial disaster zone. A consumer-led recession would hit those countries that have done well by selling to Americans.

                            According to the old adage, if the US sneezes, the rest of the world catches a cold; if the US succumbs to a cold then the rest of the world will get the flu.

                            Yesterday stock markets fell across the world as fears of a US slowdown stoked worries over the economic outlook.

                            While on Wall Street the Dow Jones index was down 40 points or 0.35 per cent, stock markets in Germany, France and Spain were all down more than 1 per cent and in London the FTSE 100 dropped 0.5 per cent

                            "The strong sterling will strengthen the headwinds for the UK economy as UK exporters take a direct hit and the consumer spending, the main driver of the UK economy, will come under further pressure," said Ted Scott, a UK equities fund manager at F&C.

                            The IMF yesterday declined to comment further. However after five years of issuing warnings over the dollar and the global imbalances, the IMF is taking action. It has launched multilateral talks to allow big players such as the US and China to talk frankly in private about the possible ways to reduce these imbalances without triggering the market reaction they dread.

                            The $2 question: Weak dollar is good for visitors to US, but outlook for world economy is bleak


                            • #59
                              The slowdown in the US economy, which has sent the dollar into freefall over the past fortnight, will have devastating knock-on effects in markets around the world, analysts warn.

                              As the US slows, and consumers in the world's biggest economy feel the buying power of the dollar in their pocket declining, global growth will be hit hard, economists say. The greenback took yet another turn for the worse on Friday, after a survey of the US manufacturing sector showed output declining for the first time in more than three years.

                              Wall Street is now betting that Federal Reserve chairman Ben Bernanke will slash interest rates to stave off a recession. The dollar ended the week at $1.98 against the pound, and $1.32 to the euro, but analysts say there is further weakness to come. 'I think the dollar's going to hell in a handbag,' said David Bloom, currency strategist at HSBC. 'The market is starting to think that the US is going from a soft landing to a hard landing.'

                              Some analysts have argued that a more balanced global economy, with strong growth in Asia and Europe, means the impact of a US slowdown will be limited; but Stephen Roach, chief economist at Morgan Stanley, believes China - and in turn the rest of Asia - will follow.

                              'America is China's largest export market, accounting for 21 per cent of its total exports over the past five years,' he said, adding that economies such as Japan, Korea and Taiwan, which export directly to the US but also sell components to China that are assembled before being sent on to the US, will be hit.

                              Eurozone finance ministers have expressed alarm at the strength of the euro against the dollar, fearing that their exporters will suffer; but the European Central Bank is expected to push up interest rates by another quarter-point on Thursday, as it frets about inflation.

                              Despite increasing signs of weakening demand in the world's biggest economy, ECB chairman Jean-Claude Trichet has insisted the 12-member single currency zone can shrug off a US slowdown.

                              'The ECB's in a complete state of denial,' said Paul Mortimer-Lee, global head of market economics at BNP Paribas. 'Quite a lot depends on how Trichet plays it at the ECB press conference next week. They're hankering after raising rates again next year.'

                              Wall Street will also be watching Bernanke for signals of a change. The Fed has left rates on hold at 5.25 per cent since the summer, after increasing them 17 times over the previous two years as the US economy recovered from the post-dotcom downturn. Bernanke sought to reassure the currency markets last week by stressing that the Fed is still concerned about inflation, but his words failed to stem the sell-off. 'It's as though the markets are saying, "you central bankers are worrying about inflation, we're worrying about the reality of life",' said Bloom.

                              Mortimer-Lee said the Fed would wait for definitive evidence before making a move. 'At the end of the tightening cycle, you know you've got an inflation problem, and it's only when the evidence is overwhelming that you move.' However, he believes that evidence will come soon: with investment in construction already falling as the housing boom turns to bust, BNP Paribas is predicting that a million jobs will be lost in the building industry alone over the coming 18 months.

                              Equity markets are already wobbling as investors weigh the cost of a US slowdown. Graham Turner of GFC Economics said a shake-out would raise questions about this year's merger frenzy.

                              'We have had an absolute monster year in terms of leveraged transactions,' he said. 'A lot of them looked quite dubious in terms of their economic value. Once the market starts to retreat, all the suspect things that went on come out of the woodwork.'

                              Plunging dollar will set world markets reeling


                              • #60
                                As the dollar's fall continues, the U.S. must decide between growth or curbing inflation:

                                Forget shopping, this could turn into a crash


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