Going down - part whatever

April 2004:

Could foreign governments, like China's, one day use this clout to influence U.S. foreign policy? Most experts say it's far-fetched. But some look at history and the state of modern markets and are worried.

[...]

The U.S. has run...deficits for years, but most of the time they were financed by private investors and their purchases were seen as a sign of confidence in the U.S. economy. But in recent years, private inflows haven't kept pace with the growth in the current-account deficit and foreign central banks have stepped into the breach, buying more than $200 billion of U.S. assets, mostly Treasury bonds and bills, last year. They do this to hold the dollar's value up against their own currencies, which makes their exports more competitive.

[...]

...but it also gives them a potential financial lever.
  Global Policy Forum article

Feb. 23, 2005:

Reports that South Korea is thinking of diversifying its currency reserves caused market ripples, but a similar hint from China could cause a tsunami.

[...]

"China is diversifying, but it is doing it very gradually," said Toru Umemoto, financial markets analyst at Keio University's Global Security Research Center in Tokyo.

"Diversification has been a global trend for years. The euro was born 1999, so it's natural that central banks will include euros in their holdings," Umemoto said. "This is a gradual step, not an explosive force."

But the dollar has spiraled lower against many global counterparts in recent months on concerns that the U.S. won't be able to attract sufficient capital flows to fund its current account deficit.

Because of this, currency investors have tended to panic at any whiff of central-bank diversification.

Last November, Russia set off a similar dollar rout when it said it might put more of its reserves in euros.

Once selling starts, speculators holding dollars run for the exits.
  Market Watch article

February 22, 2005:

The dollar fell the most in more than a week against the euro and dropped versus the yen, Korean won and the Canadian and Australian currencies after the Bank of Korea said it plans to diversify its reserves.

South Korea's central bank, which has a total $200 billion in reserves, said in a report to a parliamentary committee on Feb. 18 that it will increase investments in assets denominated in currencies such as the Australian and Canadian dollars. Korean investors, including the central bank, are the fifth-biggest foreign holders of U.S. Treasuries.
  Bloomberg article

February 23, 2005:

South Korea's central bank, which holds the world's fourth-largest foreign currency reserves, said it has no plan to sell dollars from those holdings and no plan to change the current portfolio of currencies in its reserves.

[...]

"Everybody knows the Bank of Korea has a lot of dollars, so when they said they're not going to sell, it's intervention in verbal form,'' suggesting they may sell won, said Jeff Kim, Seoul-based trader at Korea Exchange Bank. "The market is very worried about intervention'' to sell won "even though there's no action yet.''
  Bloomberg article

Just testing the waters, I suppose.

February 2005

Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a Hard Landing in 2005-2006

[...]

The defining feature of the global economy right now is the $660 billion US current account deficit. The world’s largest economy – and the world’s preeminent military and geo-strategic power – is also the world’s largest debtor.

[...]

The defining feature of the current international financial and monetary system is that it finances the United States’ enormous external deficit – and the associated fiscal deficit -- at low interest rates. The world’s central banks, not private investors, provide the bulk of the financing the United States needs to sustain its deficits.

[...]

Central banks therefore financed 90% of the United States’ $530 billion current account eficit. We won’t know the exact figures on 2004 central bank dollar reserve accumulation until June 2005, but all available information suggest that the world’s central banks did not let the US down. Expect at least another $465 billion in financing from the increase in dollar reserves this year, and an overall foreign reserves increase of $700 billion. If that estimate proves correct, central bank financing will cover around 70% of the 2004 US current account deficit.

[...]

So long as private investors holding dollar-denominated assets expect the US current account deficit will be financed, they seem willing to hold on to their existing dollar claims, though perhaps not to add to their exposure as fast as the world’s central banks. But assuming that massive reserve accumulation will continue requires overlooking growing signs that this system is under stress.

[...]

If the US does not take policy steps to reduce its need for external financing before it exhausts the world’s central banks willingness to keep adding to their dollar reserves – and if the rest of the world does not take steps to reduce its dependence on an unsustainable expansion in US domestic demand to support its own growth -- the risk of a hard landing for the US and global economy will grow.  (pdf)

February 3, 2005:

Oil, metals and even aircraft may one day be priced in euros, not dollars. Dream on?

As the dollar stays weak on foreign-exchange markets, with little sign of a sustained recovery, there is speculation that at some point commodity prices will drop the U.S. currency. If that happens, it would herald a wider realignment of the global financial system -- and would indicate that the dollar's reign as the world's reserve currency was coming to a close.

It is too early to conclude the dollar is finished. Yet the challenge is real and growing. The world may well be set for a period during which the dollar and the euro compete for reserve status -- hardly a promising situation for global stability.

[...]

There are three key responses to the changing status of the dollar in the global financial system. Central banks may shift their reserves out of dollars. The Asian currencies could end their pegs to the U.S. currency. And lastly, we could witness a breakdown in the pricing of commodities in dollars.

Central banks are already slowly raising the proportion of their reserves in euros, and reducing their dependency on dollars. That is likely to continue. Yet it will be a slow process -- not least because no central bank will want to dump dollars into an already fragile market.
  Bloomberg article

January 28, 2005:

Central banks are shifting reserves away from the US and towards the eurozone in a move that looks set to deepen the Bush administration's difficulties in financing its ballooning current account deficit.

In actions likely to undermine the dollar's value on currency markets, 70 per cent of central bank reserve managers said they had increased their exposure to the euro over the past two years. The majority thought eurozone money and debt markets were as attractive a destination for investment as the US.
  Financial Times article

January 28, 2005:

There is a limit, said Alan Greenspan a few months ago, "to the willingness of foreign governments to finance U.S. current account deficits." Fan Gang seemed to be saying that the limit had been reached.
  Daily Reckoning article

February 4, 2005:

Russia said yesterday it had abandoned efforts to tie the rouble's movement closely to the dollar and switched to shadowing both the euro and the US currency.

[...]

With 81 per cent of Russia's oil exports currently sold to Europe, the move also provoked fresh speculation that Russia could decide to denominate its oil in euros. Russia is the world's second-largest oil exporter, behind Saudi Arabia.

[...]

"The rouble's performance has been highly correlated with the dollar. Now it will be more aligned with the euro," said Paul Timmons, economist at Moscow Narodny Bank.
  Financial Times article

January 24, 2005:

The US is running a budget deficit of close to $500bn a year, funded largely by China and Japan buying large amounts of US government bonds

[...]

Many of the world's central banks are starting to look to the euro to fill their currency reserves instead of the dollar, a survey suggests.

The poll carried out by Central Banking Publications found 39 nations of the 65 surveyed raising their euro holdings, with 29 cutting back on the US dollar.

[...]

[C]entral bank holdings of dollar reserves are losing value.

"Generally, central banks' approach to reserve management is becoming much more active as they search for higher returns," said the authors of the report.

"The euro seems to have come of age."
  BBC News article