mostly for Vijay...US dollar being dumped

[Guest guest]

vijay asked about a month ago..stories like this are all over the wires now

 

http://www.twincities.com/mld/twincities/business/financial_markets/10

994906.htm

 

Asian central banks rattle markets, too

 

BY MEG RICHARDS

 

Associated Press

 

 

NEW YORK - Most American investors have never heard of Park Seung,

but he might have more influence over their portfolios than they

think.

 

He's the governor of the Bank of Korea - the Alan Greenspan of Seoul

- and a line from a statement issued by his office this past week

helped send U.S. stocks to their biggest one-day plunge since May

2003.

The suggestion that South Korea might diversify its currency holdings

away from the greenback - later retracted - also rattled the bond

market, sending interest rates higher and the price of

dollar-denominated assets like gold and oil soaring.

 

The incident underscored the vulnerability of the dollar and exposed

cracks in the U.S. currency policy, an issue analysts say is getting

harder to ignore. It also suggests that if current conditions persist,

more rough trading days lie ahead.

 

" It's the butterfly effect. All these markets are very intertwined,

and

events you think should have no impact on your portfolio suddenly do, "

said Kenneth McCarthy, chief economist at the Center for Innovative

Entrepreneurship, a nonprofit group.

 

The dollar has served as a reserve currency for much of the world

since

World War II, but its nearly three-year decline has led many central

banks to consider diversifying into other types of money, especially

in

the face of a more valuable euro. What's stopping them, analysts say,

is that a sharp decline in the dollar would have a cataclysmic effect

on the U.S. economy, which could dry up the market for Asian-made

goods.

 

" I think this question of diversifying out of the dollar is on the

minds of many central banks, but they don't want to say it, " McCarthy

said. " The last thing you want to do is trigger a sell-off of the

dollar. Nobody wants to do that. "

 

For America, a hearty foreign appetite for U.S. assets and debt is

critical to help cover the record-high current account deficit. Some

43

percent of all U.S. Treasuries and bonds are held by foreigners. But

economists, even Greenspan himself, have worried that at some point

the

central banks - particularly those in Asia, the biggest investors in

U.S. debt - might start selling U.S. dollars.

 

This isn't a new concern. But when South Korea, with the world's

fourth-largest foreign exchange reserve, said in a parliamentary

report

it might consider diversifying its currency holdings, it caused " a

panic in the markets, " McCarthy said, as large hedge funds and other

powerful speculators rushed to take advantage of the situation.

 

South Korea's central bank governor attempted to clarify his country's

position in the ensuing days, saying it had no plans to sell existing

dollar assets, though it might use new reserves to diversify into

British pounds or Canadian dollars. Japanese finance officials said

they weren't planning major changes to their currency asset mix,

either.

 

The bottom line, analysts say, is that Tuesday's trading was mostly

driven by speculation. But while the panic has subsided, and stocks

have recouped some of their losses, the event has resonated among

market watchers. Some economists say that even if Korea makes only

marginal changes, it could have significant ripple effects. The

market's reaction on Tuesday serves as a further signal that the

current arrangement - relying on Asian central banks to forestall the

dollar's slide - is unsustainable.

 

If central banks in Japan, Taiwan and Korea all made changes at once,

some analysts argue, it could cause China to re-evaluate its currency

policy, because it would wind up having to buy even more dollars than

it does now to maintain the yuan's peg to the U.S. currency. In this

regard, China has " painted itself into a corner, " said Peter Morici, a

business professor at the University of Maryland.

 

" This is the way a currency crisis begins, " Morici said. " Several

countries are involved in maintaining an overvalued dollar, and if

Korea moves, it imposes costs on China and other countries also buying

dollars. So even at the margin, this will cause other countries to

re-evaluate their position, and as each pulls away, China will be

faced

with a larger and larger bill. "

 

What makes China " the kingpin, " in the situation, Morici said, is that

it has been the most active in buying U.S. debt. As of last year,

China

was spending 12 percent of its gross domestic product on foreign

securities - much of it U.S. assets.

 

It's unlikely China will dump its dollar reserves, Morici said,

because

that would cause a financial crisis that would disrupt its trade with

the United States, cause massive unemployment in China and ultimately

threaten the stability of the communist regime. But sooner or later,

China will have to take steps to revalue its currency.

 

Over the long term, that could bring higher interest rates in the

United States, and in turn, declines in the housing market. In the

short term, speculation about what lies ahead will likely mean more

volatility in stocks. For small investors, the best way to deal with

it

is to stand firm, McCarthy said.

 

" Over the longer term, the values of equities are going to be

determined by the value of the underlying company and their ability to

deliver earnings. And although it's upsetting to the market when these

kinds of macro things happen, that's not the time to sell, " McCarthy

said. " What investors need to pay attention to, in the long run, are

those fundamentals, and not the day-to-day jumps. You may end up

eating

more Tums, but basically ... you should continue your strategy. "

 

In the resulting frenzy Tuesday, the dollar, which had been on the

rise

and seemed to be stabilizing, plunged, giving incentive to anyone who

wanted to sell, and launching programmed trades for those who had

shorted it. Oil prices surged as market participants bet the

Organization of Petroleum Exporting Countries might cut production at

its meeting next month in order to raise crude prices and offset the

decline of the dollar. The cartel's president has said this is

unlikely; oil prices are already 50 percent higher than they were a

year ago, despite the fact that domestic fuel supplies are well above

 

Kick over the wall 'cause government's to fall

How can you refuse it?

Let fury have the hour, anger can be power

D'you know that you can use it?