Financial Times: Dollar recovers on denial of Chinese sell-off

Dollar recovers on denial of Chinese sell-off

By Steve Johnson in London and Mure Dickie in Beijing

Published: November 26 2004 11:14

Last updated: November 26 2004 11:14

The dollar rallied from new lows in European morning trade on Friday as a Chinese official backtracked from earlier claims that China had started to shift its vast foreign exchange reserves out of dollars.

Shanghai-based China Business News quoted Yu Yongding, a member of the central bank’s advisory monetary policy committee, as “revealing” that the rate of increase of holdings of US government bonds had fallen and total holdings were currently around $180bn.

This tied in with recent speculation that China, which is believed to hold around 80 per cent of its $515bn of reserves in dollars, has already begun to diversify out of the dollar in order to minimise potential losses in the event of a further dollar decline. Russia’s central bank hinted on Tuesday that it would continue its policy of shifting reserves from dollars to euros, and there have been suggestions that Japan may follow suit.

Analysts also seized on data released on Thursday showing portfolio inflows into the eurozone rose to €39.6bn in September from €6.3bn in August as evidence of an ongoing shift out of US assets.

Meanwhile Charles Bean, chief economist at the Bank of England, said: “Overseas investors are unlikely to continue accumulating dollar assets at the current rate indefinitely.”

The China Business report helped send the dollar sharply lower to a fresh all-time low of $1.3329 against the euro, a near five-year low of Y102.19 against the yen and a nine-year low of SFr1.1337 against the Swiss franc.

However Prof Yu claimed the report was an erroneous account of an off-the-record address to students in Shanghai and stressed that he had no personal knowledge of the composition of China’s foreign exchange reserves or reserve strategy.

Prof Yu, a respected professor of economics, said he had merely quoted statistics from the US Federal Reserve supplied to him by friends at a foreign investment bank. “I think the Chinese monetary authorities are very clever and they must already have taken action,” he said. “But I have no information whatsoever about what they are doing.”

Analysts also questioned Prof Yu’s comment that holdings of US government bonds had fallen to $180bn. The most recent US Treasury data showed China holding $174.4bn of Treasuries in September. At the recent rate of accumulation, this would only have risen to $180.8bn by the end of this month anyway, according to Mitul Kotecha, global head of FX strategy at Calyon.

Adam Cole, senior currency strategist at RBC Capital Markets, suggested that the real story was that China was slowing the pace at which it accumulates US Treasuries. “This should not be major news as there has been a general perception that China was diversifying reserve holdings out of dollars for some time,” he said.

This clarification, combined with renewed jitters about the prospect of intervention to prop up the ailing dollar, allowed the greenback to erase all of the losses incurred in Asian trading, recovering to $1.3224 against the euro, Y102.92 versus the yen and SFr1.1462 against the Swiss franc.

“After moving nearly 4 cents in a week [against the euro], the dollar’s decline is turning disorderly, raising the chances of aggressive central bank intervention, perhaps within days,” said Mark Cliffe, economist at ING Financial Markets.