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Asian policy makers met to discuss dollar''s slide
11:06p ET Wednesday, February 23, 2005
Dear Friend of GATA and Gold:
The Financial Times editorial appended here
is interesting for acknowledging that the
U.S. dollar stays afloat only with the
greatest assistance from foreign central
banks and that the first central bank to
start dumping dollars wins while the others
are likely to lose.
But the FT editorial is a bit dense for not
acknowledging something else in regard to
foreign exchange reserves. The FT says:
"Diversification might not succeed in its
objective of minimising capital loss. It all
depends on what currency one diversifies
into. The euro is no longer obviously cheap.
If and when Asia revalues, the euro could
even fall against the dollar. In this case
the capital loss would be greater on euro
holdings than on dollars."
But of course central banks and everyone
else seeking to diversify dollar holdings
can also diversify into something that, by
inflation-adjusted standards, is cheap. You
know what it is, even if the World Gold
Council would never suggest it and, even if
it did come up, would just call it really
nice jewelry.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
Dollar Scare Reveals Fragile Support
Financial Times, London
Comment and Analysis
Thursday, February 24, 2005
http://news.ft.com/cms/s/7468d91e-860b-11d9-b506-00000e2511c8.html
Crisis over? Not really.
For sure, the market overreacted to reports that the Bank of Korea
wanted to reduce the share of dollars in its portfolio. What the
Koreans actually said was that they want to diversify out of low-
yielding US Treasuries into higher-yielding securities, which could
include riskier US assets as well as non-US government bonds. And
they intend to do so by diversifying the flow of reserves, not the
$200 billion (105 billion) stock.
But while Tuesday's selloff was founded on error, it nonetheless
exposed the underlying weakness of the US currency. If the mighty
dollar can be rocked by a single paragraph in a report to the Korean
parliament, something is amiss.
That something is the dependence of the dollar on a handful of Asian
central banks, which between them control $2,400 billion in
reserves. These reserves are already large relative to the size of
the Asian economies and getting bigger by the day. As they grow so
does the incentive to guard against capital loss from further dollar
depreciation.
Very obviously, if all the Asian central banks were to start selling
their stock of dollars the US currency would plunge. But such a
generalised rout would also force the Asian currencies to appreciate
against the dollar. If either Japan or China were to sell dollars,
the effect would probably be the same. However, the first mid-sized
country to bail out of the dollar might be able to get a good price
for its assets and maintain its bilateral exchange rate, encouraging
others to follow.
But even if Asian central banks do not sell their stock of dollars,
the US currency is not safe. With private appetite for US assets
inadequate and volatile, the US relies on continued purchases by
central banks to fund its current account deficit and acquisition of
foreign assets by US residents. If their appetite dims, unless
private flows soar, the dollar will still fall (and keep on doing so
until the change in the relative price of imports and exports
narrows the current account deficit to a sustainable level).
Diversification might not succeed in its objective of minimising
capital loss. It all depends on what currency one diversifies into.
The euro is no longer obviously cheap. If and when Asia revalues,
the euro could even fall against the dollar. In this case the
capital loss would be greater on euro holdings than on dollars.
Asian countries need more Asian assets. Again, in aggregate they
cannot obtain them without forcing up their currencies, though
individual countries acting alone could do so.
In the end the only sure way to limit capital loss is to stop
intervening and allow currencies to rise. The yen and Korean won
have appreciated significantly since 2002. But while others remain
pegged, such appreciation disrupts intra-Asian exchange rates and
trade.
The optimal solution is a co-ordinated revaluation, led by China.
But while the Chinese economy thrives and inflation stays under
control, Beijing has little incentive to agree.
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