Monday, September 10, 2007

After Credit Crunch... then Dollar Crunch...

Foreign Holders Flee Dollar

Interest-rate futures show traders are betting with 100 percent certainty the Fed will trim its benchmark by at least a quarter percentage point to 5 percent at its meeting Sept. 18.
Former Fed Chairman Alan Greenspan said on Sept. 6 that forces behind current market turmoil are ``identical'' to previous economic upheavals, including the 1987 stock-market crash and the aftermath of the 1998 Russian debt default and collapse of hedge fund Long-Term Capital Management LP.
The central bank cut its benchmark rate three times between September and November 1998. The dollar ended the year 13 percent weaker against the yen, and Treasuries fell for three straight quarters starting in the period ended Dec. 31, 1998.

Shifting Reserves
Asian central banks also reduced Treasuries last month in an effort to curb dollar gains against their currencies. Taiwan's central bank cut its currency reserves by $4.9 billion in August, mostly by selling U.S. bonds, George Chou, a deputy governor of Central Bank of the Republic of China (Taiwan), said in an interview.
Even before the flurry of sales, more nations were starting to shift foreign-exchange reserves away from U.S. government bonds.
Taiwan lawmakers are discussing whether to set up a fund to seek higher returns, Chou said. China is starting a fund to do the same for some of its almost $1.4 trillion in reserves. The fund raised $79 billion selling debt to the central bank last month.
China will likely, and appropriately, ``reduce its holdings of dollar assets to get higher returns,'' said Ha Jiming, chief economist in Beijing at China International Capital Corp., the nation's largest securities firm. Ha attends central bank Governor Zhou Xiaochuan's quarterly meeting with the nation's lenders.
The $50 billion Qatar Investment Authority said on Sept. 4 it is looking for options in Asia to counter a weak dollar.

No comments: