Dollar falls on Geithner's openness to China's currency proposal

By Oliver Biggadike and Ye Xie
Bloomberg News
Wednesday, March 25, 2009

http://www.bloomberg.com/apps/news?pid=20601101&sid=aNRvu1DywrG0

NEW YORK -- The dollar fell the most in almost a week against the euro on concern Treasury Secretary Timothy Geithner supported a Chinese plan to blunt demand among global central banks for the greenback.

The U.S. currency pared losses after Geithner clarified comments on the International Monetary Fund's special drawing rights and said the dollar will remain the world's primary reserve currency "for a long period of time."

"The dollar's having a bad week," said Jessica Hoversen, a foreign-exchange analyst in Chicago at MF Global Ltd., the world's largest broker of exchange-traded futures and options contracts. "Government policy is only as effective as the government is credible. Having a government official speak out of both sides of his mouth in five minutes erodes credibility."

The U.S. currency weakened as much as 1.2 percent to $1.3651 per euro, the biggest intraday decline since March 19, before trading at $1.3602 at 4:16 p.m. in New York. The dollar dropped 0.5 percent to 97.37 yen from 97.86. The euro increased 0.5 percent to 132.42 yen from 131.81.

The dollar fell versus most major currencies on Geithner's comment in response to a question at a Council on Foreign Relations event in New York on People's Bank of China Governor Zhou Xiaochuan's proposal regarding the use of special drawing rights, units of accounting at the fund used for member countries' reserves with the IMF.

The Treasury secretary said that "as I understand his proposal, it's a proposal designed to increase the use of the IMF's special drawing rights. And we're actually quite open to that suggestion."

When Geithner was later asked whether he wanted to clarify his remarks, he affirmed the dollar's role as the world's reserve currency.

"It's a big part of American power," said John Taylor, who oversees about $11.4 billion as chairman of New York-based FX Concepts Inc., the biggest foreign-exchange hedge fund. "Our markets are the biggest and the best. Yes, the world's doing really awful and we're the reason the world's doing really awful in a way. But at the same time, everybody's looking to us to get the world out of it."

Zhou said on March 23 in a report posted on the bank's Web site that special drawing rights, monetary units valued against a composite of currencies, should also be used for international trade, financial transactions, and commodity pricing. The IMF should aim in the longer term to create a "super-sovereign reserve currency," Zhou said.

South Korea's won was the biggest gainer versus the dollar after a finance ministry official said yesterday the government aims to spend 17.7 trillion won ($13.3 billion) by May or June to help the economy recover.

"There's some positive sentiment that has led to a softening of the U.S. dollar" against the won, said Thio Chin Loo, a senior currency analyst at BNP Paribas SA in Singapore.

The won climbed as much as 2.1 percent to 1,362 per dollar, the strongest level since Jan. 29. South Korea's economic stimulus plan includes funds for cash handouts, cheap loans, infrastructure and job training, the government said yesterday.

South Korea's currency is the biggest loser against the dollar this quarter, dropping 7.6 percent on speculation the nation's economic slump will deepen.

The dollar fell earlier versus the euro as a government report showed an unexpected gain in orders for durable goods last month, reducing demand for the safety of the greenback.

Orders for U.S. durable goods increased 3.4 percent in February, the biggest gain in more than a year, the Commerce Department reported today. The median forecast of 69 economists surveyed by Bloomberg was for a decrease of 2.5 percent. Another report from the department indicated new-home sales increased 4.7 percent from a record low pace in January, compared with a 2.9 decrease forecast by economists.

The 16-nation euro advanced earlier versus the dollar as a report showed German business confidence this month was in line with the expectations of economists.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, was 82.1 in March, compared with 82.6 in the previous month. The median forecast of 37 economists surveyed by Bloomberg was for a drop to 82.2. The reading was the worst since November 1982.

"Sentiment data is pretty dire around the world at the moment, and the German Ifo is a prime example of that," said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. "However, it more or less matched expectations, and as long as things don't get worse the euro will benefit."

* * *

To contribute to GATA, please visit:

http://www.gata.org/node/16