China says it long has had a dollar diversification plan. Do you?

8:06p ET Monday, September 4, 2006

Dear Friend of GATA and Gold:

Maybe you've heard the one about the two central bankers passing each other in the hall at the Bank for International Settlements in Basel, Switzerland. One says "hello" and the other thinks, "I wonder what he meant by that."

That's how you have to regard the comment made to Reuters by the governor of the People's Bank of China, Zhou Xiaochuan, and quoted in the Bloomberg story below. (Sorry, but we've been unable to locate the original Reuters story.) Zhou sent the U.S. dollar tumbling today by remarking at a European Central Bank conference in Frankfurt:

"All central banks are trying to diversify. We have had a very clear diversification plan for several years."

As an analyst quoted in the Bloomberg story says, the Chinese central banker may have meant only to deflect the usual complaints from the United States that China is not allowing the yuan to reach a market value quickly enough. On the other hand, to accomplish this Zhou need not have remarked that "all central banks are trying to diversify," nor that China has been undertaking diversification "for years."

After all, ALL central banks have NOT made such official statements, even as it would seem possible if not probable that central banks ALREADY have been diversifying or hedging their dollar reserves at least surreptitiously in anticipation of the day after the next meeting like the one at the Plaza Hotel in New York in September 1985, when the world woke up to find that the dollar would be worth a lot less and the German deutsche mark and Japanese yen a lot more, on account of a new plan of central bank intervention in the currency markets. (Over the next two years the dollar fell by about half.)

Maybe that's what all that central bank gold selling and leasing has been about -- distributing gold to the big dollar surplus holders to help them hedge against the devaluation of the dollar, insuring them and buying time for the dollar while allowing ordinary dollar holders to get screwed when the big change happens overnight.

What's YOUR dollar diversification plan?

It could be as simple as GoldMoney, a concealed and watertight compartment holding coins and bullion in your basement or back yard, a safe deposit box in a bank down the street from the BIS in Basel, or some really nice jewelry insured by Prudential or Smith & Wesson or, preferably, both.

For practically everything official these days in the United States and Western Europe is a lie, and even those of us who sense this and are acting accordingly are going to be a bit hurt and disappointed when it all comes out.

As for the central bankers, well, you can be sure that the hotel from which they announce their next screwing of the world will be as nice as the Plaza.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Dollar Declines After
Reuters Says China
May Diversify Reserves

By Daniel Kruger and Min Zeng
Bloomberg News Service
Thursday, November 9, 2006

http://www.bloomberg.com/apps/news?pid=20601080&sid=a.vuqN80Tb9U

NEW YORK -- The dollar fell to the lowest against the euro in more than two months after Reuters reported People's Bank of China Governor Zhou Xiaochuan said he has a "clear" plan to diversify the country's foreign-exchange reserves.

China's foreign-currency reserves have exceeded $1 trillion to become the most ever held by a single country, China Central Television reported on Nov. 7, citing the nation's currency administrator. U.S. assets may comprise 72 percent of China's reserves, according to Miller Tabak & Co. in New York.

"The market is taking this as a hint that China may speed up its pace of diversification away from the dollar and into other currencies," said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut.

The dollar traded at $1.2836 per euro at 2:06 p.m. in New York from $1.2757 yesterday. The U.S. currency touched $1.2848, the lowest since $1.2875 on Sept. 5. The U.S. currency traded at 117.91 yen from 117.84. The dollar earlier reached 118.59 yen.

The U.S. trade deficit with China rose to an all-time high of $23 billion in September, from $22 billion in August, according to a government report. Imports from China increased to a record $27.6 billion in September. U.S. exports to the Asian nation fell to $4.6 billion.

The growing deficit in trade with China overshadowed a narrowing of the overall U.S. trade deficit. The shortfall, which was smaller than forecast, declined to $64.3 billion from an all-time high in August of $69 billion, the Commerce Department said in Washington.

China has been criticized by U.S. lawmakers who say it works to keep the value of its currency undervalued to maintain cheap exports, worsening the U.S. trade deficit.

Gold rose after the announcement by the Chinese central bank's governor. Futures for December delivery increased $18.50, or 3 percent, to $636.80 an ounce on the Comex division of the New York Mercantile Exchange. A close at that price would mark the biggest gain for a most-active contract since June 30.

When asked whether China planned to shift its reserves away from Treasury notes and into higher-yielding U.S. corporate and mortgage-backed debt, Zhou said China is considering "lots of instruments" for diversification.

"All central banks are trying to diversify," he told Reuters on the sidelines of a European Central Bank conference in Frankfurt. "We have had a very clear diversification plan for several years."

"The market has long been waiting and fearful of any Chinese indications to diversify," said Brian Dolan, research director at Forex.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million worth of funds under management. "The prime beneficiaries will be the euro, yen, pound, and Australian dollar."

The People's Bank of China joins the Bank of Russia and the Swiss National Bank in announcing intentions to diversify currency holdings in the past month.

"The long-term impact is going to be dramatic and sustainable," said Firas Askari, head currency trader at BMO Capital Markets in Toronto. "The dollar has long been the reserve currency for the entire world. Now with central banks saying they are going to diversify away from the dollar, the dollar will suffer. The euro will be one of the biggest beneficiaries of the trend."

The yuan is trading near its strongest since China revalued the currency and allowed it to move as much as 0.3 percent in a day against a basket of currencies. The yuan closed at 7.8665 per dollar in Beijing from 7.8661 yesterday.

The Chinese currency has gained 2.6 percent against the dollar this year, compared with an 8.3 percent gain for the euro, a 7.8 percent increase for the South Korean won and a 0.2 percent decline for the Japanese yen.

"The gate is open for yuan appreciation," said Michael Malpede, a senior currency analyst in Chicago at Man Global Research.

Traders have speculated that Democratic control of Congress may make protectionist legislation more likely, which would add tension to the U.S. relationship with China.

China "probably wanted to take some of the heat off" following its record surplus in U.S. trade, Malpede said. Discussing reserve reallocation "is a way of trying to deflect criticism."

Since Sept. 27, the date by which Sens. Charles Schumer and Lindsey Graham had threatened to vote on a bill to impose a 27.5 percent duty on Chinese goods to help narrow the U.S. trade deficit, the Chinese currency has gained 0.5 percent versus the dollar. It compares with a 1 percent gain for the euro, a 0.8 percent advance for the won and a drop of 0.4 percent for the yen.

Treasury Secretary Henry Paulson persuaded the senators to delay the vote.

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