Several weeks ago, I wrote in another column that China was not going to be happy with the US Federal Reserve's rate cuts and that they would think about either unloading some of their Treasury Bonds or diversifying out of dollars.
Yesterday, Cheng Siwei, vice chairman of China's National People's Congress told an audience that China was looking to improve the structure of its $1.43 trillion of foreign reserves by favoring stronger currencies. This phrase basically means they are going to sell dollars.
The dollar has already collapsed without China selling and this collapse will only continue and accelerate with China's announcement. It now makes the dollar, once the currency of choice, a global pariah.
The American dollar was fixed against the Yuan until mid-05. Since then, it has begun a descent that will continue.
What does this all mean? It means increased inflation as it costs Americans more to import foreign goods and to travel abroad. It will also help exports and jobs and what remains to be seen is whether this benefit outweighs the pounding our global buying power has taken.
Comments
soczie
November 08, 2007
The dollar's continued fall is certainly troubling, but the latest decline is just hedge funds trying to find reasons to push it lower. Cheng did not explicitly state that the Chinese government is going to be selling here. He outlined a long term goal of greater diversification. The Chinese aren't stupid and they aren't going to dump all of their dollars when the US currency is at its low.
Is this review helpful? Yes:0 / No: 0
HiLo
November 08, 2007
But they also aren't going to wait for the dollar to plunge further. I bet they start selling soon and keep it up until they've achieved some diversification. This will put further pressure on the dollar.
Is this review helpful? Yes:0 / No: 0
Add your Comment
or use your BestCashCow account