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CNBC interviews GATA consultant James Turk, author of new book on dollar crash
By William Pesek Jr.
Bloomberg News Service
Friday, January 28, 2005
http://quote.bloomberg.com/apps/news?
pid=10000039&refer=columnist_pesek&sid=aEBBmwvtNuxA
KUALA LUMPUR, Malaysia -- Malaysia isn't a place traders
look for clues about the U.S. dollar. Yet Asia's No. 10
economy may be offering some ominous ones.
They can be found in a recent report on international reserve
holdings at Bank Negara Malaysia, the nation's central bank.
It states that Malaysia made a $2.1 billion "revaluation gain"
in 2004, "arising mainly from the depreciation of the U.S.
dollar against the major currencies."
Central banks are always reticent to detail their holdings,
but one can't help but wonder if Malaysia is buying an
increasingly amount of euros -- or even yen -- these days.
Its central bank sure didn't make that kind of cash holding
the dollar, the currency to which its own, the ringgit, is
pegged.
The plot thickens when you consider how such a shift
away from the dollar would jibe not only with comments
from top Malaysian officials, but trends throughout Asia.
Here in Malaysia, for example, Prime Minister Abdullah
Ahmad Badawi recently said he is seeking ways to
reduce the economy's reliance on the dollar for trade.
Indonesia has mentioned it is considering trimming its
holdings of U.S. Treasuries. The same goes for
Thailand, according to the Financial Times.
China also has been in the news as traders speculate
that Asia's No. 2 economy may pull the plug on
dollar-denominated debt. Such a move by the
second-biggest holder of U.S. Treasuries after Japan
could send shockwaves through global markets.
Hence all the fuss over comments by Chinese
economist Fan Gang. Fan isn't a government official;
he's director of the state-owned National Economic
Research Institute in Beijing. The connection seemed
close enough for traders who found great relevance in
Fan's comment that China has lost faith in the dollar,
to which its currency is pegged.
"The U.S. dollar is no longer, in our opinion ... (seen)
as a stable currency and is devaluating all the time,
and that's putting troubles all the time," Fan said,
speaking in English, at the World Economic Forum
in Davos, Switzerland. "So the real issue is how to
change the regime from a U.S. dollar pegging to a
more manageable reference, say, euros, yen, dollars
-- those kind of more diversified systems."
Paul Donovan, London-based senior global economist
at UBS AG, seemed to speak for many traders and
investors when he said: "This in fact is a scenario we
consider to be highly likely." Certainly more likely than,
say, China letting the yuan trade freely.
Again, Fan isn't a Chinese policy maker, and it's
unclear how close he is to the economic
decision-making process. Still, his views have a certain
logic to them. Irony too. The U.S. has been using its
might to bully China into revaluing the yuan. Yet it
seems it is U.S. weakness -- a fragile dollar -- that may
be the catalyst.
It means now is as good a time as any for this region
to avoid losses ahead of any surge in U.S. debt yields.
After all, in real estate, it is all about location, location,
location. With markets, it's timing, timing, timing, and
waiting means Asian central banks may lose even
more.
Confidence in the dollar wasn't enhanced this week by
President George W. Bush's record budget deficit
forecast of $427 billion for this fiscal year. It belied
assurances that the White House will bring one of the
world's most worrisome economic imbalances under
control.
All this has investors turning to the euro. Once Asian
central banks do, the dollar's woes will worsen. By
buying vast amounts of Treasuries, Asian central
banks are delaying the rise in U.S. yields that would
typically accompany a falling currency. If Asians pull
the plug, U.S. rates could skyrocket.
Central banks here don't buy U.S. debt out of altruism.
Hoarding dollars is necessary to hold down currencies
to boost Asian growth. Yet dumping dollars would
result in stronger Asian currencies and, by extension,
Asian gross domestic product.
Smaller economies like Indonesia, Malaysia, or
Thailand may be able to trim dollar holdings without
undermining their own economies. The same can't be
said of Japan and China; combined, they own $906
billion of the roughly $1.1 trillion of U.S. Treasuries
held overseas.
Still, the day of financial reckoning that investors fear
may be getting closer.
It has long been said that Japan's bond market is a
bubble waiting to burst. Even with a national debt
approaching 150 percent of GDP, 10-year Japanese
debt yields just 1.32 percent. Asians have to wonder
if U.S. rates are irrationally low too. Do yields at
4.19 percent for U.S. 10-year debt really compensate
investors for the risks they face?
The U.S. finds itself in a be-careful-what-you-wish-for
situation here. If China tomorrow announced it was
letting the yuan float, as the U.S. wants, its central
bank wouldn't need anything near the $191 billion of
U.S. debt it holds. Massive dollar selling could follow.
Asian central banks like China's have become
America's bankers, financing its excesses through
good times and bad. It's now up to Asia to decide
whether to extend the U.S.'s line of credit. The U.S.
should be warned that the odds are moving less and
less in its favor.
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