Dollar Slumps to Record on China's Plans to Diversify Reserves By Agnes Lovasz and Stanley White
Last Updated: November 7, 2007 07:17 EST
Nov. 7 (Bloomberg)
-- The dollar fell the most since September against the
currencies of its six biggest trading partners after Chinese
officials signaled plans to diversify the nation's $1.43
trillion of foreign exchange reserves.
The dollar fell against all 16 of the
most-active currencies, declining to the weakest versus
the Canadian dollar since the end of a fixed exchange
rate in 1950, a 26-year low against the pound and a
23-year low versus the Australian dollar. The New York
Board of Trade's dollar index dropped to 75.21 today,
the lowest since the gauge started in March 1973.
``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.''
The U.S. currency slumped to $1.4704 per euro, the lowest
since the 13-nation currency debuted in January 1999,
before trading at $1.4671 as of 7:15 a.m. in New York,
from $1.4557 late yesterday. The dollar dropped the
most in two months against the yen, trading as low as
112.87 yen. The euro fell against the yen to 165.84,
from 166.99 yesterday.
The U.S. dollar index may be due for
a reversal, according to a technical indicator. Its
14-day relative-strength measure fell to 21.38 today,
below the 30 mark, which may signal the currency's decline
has bottomed out.
A woman walks past a sign featuring
a fist holding U.S. dollars in central Beijing on Nov.
27, 2006. Photographer: Natalie Behring/Bloomberg News
In technical analysis, investors and analysts study charts of
trading patterns and prices to forecast changes in a security,
commodity, currency or index.
``We will favor stronger currencies over weaker ones, and will
readjust accordingly,'' Cheng Siwei, vice chairman of China's
National People's Congress, told a conference in Beijing.
The dollar is ``losing its status as the world currency,''
Xu Jian, a central bank vice director, said at the same meeting.
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 U.S. currency may weaken to between $1.48 and $1.50 against
the euro by year-end, Knuthsen said.
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.
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 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.
``Cheng has a history of speaking out on a range of financial
market and economic developments, and his comments are not
always accurate,'' said Glenn Maguire, chief Asia economist
at Societe Generale SA in Hong Kong.
Cheng's remarks on Jan. 30 that China's stock rally was a
``bubble'' caused the benchmark index to fall the most in
almost two years the following day. The Shanghai and Shenzhen
300 Index, then over 2,500 points, has since climbed above
The euro's gains may be limited by speculation European economic
growth may slow, reducing the need for higher interest rates.
The European Central Bank will keep its key rate at 4 percent
tomorrow, according to all 61 economists surveyed by Bloomberg
News. Data yesterday showed manufacturing orders in Germany
fell more than expected in September.
``The euro is clearly overvalued against the dollar,'' Emanuele
Ravano, co-head of European strategy for Pacific Investment
Management Co., which manages the world's biggest bond fund,
said late yesterday in Brussels. The ECB ``over the course
of 2008 will totally change its tune'' by cutting in the second
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.
The dollar's decline helped drive the price of crude oil
to a record $98 a barrel and gold to a 27-year high, encouraging
investors to buy assets in commodity-producing nations.
Commodity currencies led the gains today. The Canadian dollar
advanced to $1.1040. The Australian dollar gained to 93.98
U.S. cents, the highest since April 1984, from 92.87 U.S.
cents. The rand rose to as high as 6.4294 per dollar, the
highest since May 2006. The pound rose to $2.1052, the highest
since May 1981.
The dollar's 9.8 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.
French President Nicolas Sarkozy yesterday raised concern
about the euro's strength during a visit to the U.S., saying
``you don't need too weak a dollar'' to spur growth in the
world's largest economy.
``This is an asset story and shows sentiment for the dollar
continues to be quite negative,'' said David Forrester, currency
economist at Barclays Capital in Singapore.
The Australian dollar gained after the country's central
bank raised its benchmark borrowing cost to 6.75 percent today.
Governor Glenn Stevens, announcing the quarter-point rate
increase, said inflation will exceed the bank's target.
Pressure on Fed
The dollar fell against the Norwegian krone as traders added
to bets Norway's central bank will increase its 5 percent
deposit rate. It declined to 5.2835 kroner, from 5.3474. The
dollar also dropped as losses from subprime-mortgage defaults
added to pressure on the Federal Reserve to lower its target
for the overnight lending rate between banks to 4.25 percent
``The interest-rate outlook is dragging down the dollar against
major currencies such as the euro and the Australian dollar,''
said Seiichiro Muta, director of foreign exchange in Tokyo
at UBS AG, the world's second-largest currency trader. ``I
cannot see the bottom of the dollar depreciation yet.''
Interest-rate futures traded on the Chicago Board of Trade
show a 62 percent chance of a quarter-percentage point Fed
rate cut on Dec. 11, compared with 6 percent a month ago.
Citigroup Inc. may write down an additional $2.7 billion worth
of subprime- related assets, CreditSights Inc. said yesterday.
New Zealand's dollar rose to 78.35 U.S. cents from 78 U.S.
cents on speculation a report tomorrow will show the unemployment
rate remained at a record low, boosting the chance of another
increase to the country's record 8.25 percent benchmark interest