New York Times: Dollar Drops Further as Central Banks Reassess Reserves By ERIC PFANNER

Dollar Drops Further as Central Banks Reassess Reserves
By ERIC PFANNER
International Herald Tribune

LONDON, Nov. 26 - The falling dollar reached new depths against the euro today, after a weeklong erosion of value prompted by concern that the dollar's status as the premier international reserve currency is growing more precarious.

The central bank of Russia said today that it would stop trying to peg the ruble solely against the dollar, shifting instead to a target based on a basket of global currencies. That could result in a decline in dollar purchases by the Russian central bank, whose currency reserves are dominated by dollar assets.

The biggest questions hang over Asian central banks, which have bought hundreds of billions of dollars' worth of United States Treasury securities and other dollar-denominated assets in recent years to slow the decline of the dollar, in order to safeguard their countries' exports to the United States.

Comments by a Chinese central bank official, suggesting that the bank might slow its dollar purchases, briefly sent the American currency into a volatile spin before they were retracted.

Analysts say any move to shift those banks' assets out of dollars could result in a sharp long-term fall in the dollar, given that the United States requires a steady inflow of close to $2 billion a day in international funds to finance its current-account deficit, a broad measure of trade in goods and services.

"The present situation could be maintained for a while yet, but overseas investors are unlikely to continue accumulating dollar assets at the current rate indefinitely," said Charles Bean, chief economist at the Bank of England, in a speech late Thursday. His comments appeared to echo a warning from Alan Greenspan, chairman of the Federal Reserve, last week.

By adding more euros and other currencies into the mix, central banks overseas would be able protect themselves against a loss of value in their holdings if the dollar continues to slide. The currency mixes of those banks' reserves may also reflect more accurately the trade relationships of their economies. A number of comments from Asian central bankers in recent days suggest that these banks are at least growing more reluctant to add to their vast quantities of dollar reserves, even if, analysts say, no wholesale move to dump them seems imminent.

The Chinese central bank official, Yu Yongding, appeared today to confirm market fears of a reappraisal of the bank's dollar holdings. The dollar bounced back, however, after a clarification from Mr. Yu, published on a Web site. Analysts said it remained unclear whether any policy changes were immediately in store at the Chinese central bank.

"Treat the story with caution, as it appears a tad dramatic," analysts at ABN AMRO wrote in a note to investors.

Indeed, the report, from China Business News, appeared to reflect confusion over the nature of China's dollar-denominated holdings. It quoted Yu as saying China had cut its Treasury holdings to $180 billion. But United States government data had recently shown Chinese holdings of only $174 billion in Treasury bonds.

If bonds issued by United States government agencies and other assets are included, however, China's dollar reserves probably are far higher.

Analysts at Barclays Capital said the central bank has total international reserves of more than $500 billion, about 70 percent of which probably has been invested in dollars.

A number of comments from other Asian central bankers - often quickly denied when reported by news agencies - have fueled speculation that their employers might consider shuffling their portfolios.
On Tuesday, a Russian central bank official, Alexei Ulyukayev, said his bank was considering altering the mix of its reserve holdings, possibly adding more euro-denominated assets, as the dollar weakens. And today, the bank's deputy chairman, Konstantin Korishchenko, said the bank would henceforth aim to keep the ruble trading within a range determined by a basket of currencies, not just the dollar.

The dollar, which traded as low as 102.18 Japanese yen after Yu's remarks, bounced back to 102.59 yen in New York today, up marginally from 102.58 yen late Thursday. The euro, which soared as high as $1.3329, was quoted late in New York at $1.3297, still up from $1.3240 on Thursday.

The size of the swings in the dollar today may have been magnified by the fact that currency trading desks were thinly staffed because of the Thanksgiving holiday in the United States and because Mr. Yu's comments came during the nighttime hours in London, the hub of global foreign-exchange trading.

Still, analysts say the overall tone for the dollar remains negative amid growing concern about the gap in the United States current account, as well as the shortfall in the federal budget.

Against the euro, "$1.35 now seems a natural target in the current dollar-selling frenzy," the ABN AMRO analysts wrote.

Other analysts say the dollar could fall further next year.

Still, a cautious tone prevailed in the markets as traders sought to prevent overexposing their own positions. Because the dollar has dropped so rapidly, falling nearly 8 percent against the yen since early October, for instance, it could bounce back sharply in the short term as traders take profits.

Also, there is the possibility of market intervention by central banks to try to prevent a sudden loss of confidence in the dollar. Most analysts think the Federal Reserve and the European Central Bank are unlikely to intervene in the near term, though the E.C.B. would grow increasingly worried about the strength of the euro if it climbed over $1.35.

Meanwhile, China has signaled that it will continue to resist calls to revalue the yuan in the near term, and Japanese policy makers want to avoid an overly steep climb in the value of the yen, which could undermine Japan's economic recovery.

As the dollar has fallen in recent weeks, it has pushed up the value of gold and oil. Trading in both of those commodities is denominated in dollars, so some of the movement is simply a balancing effect as the dollar weakens. But gold is also seen as a store of value at times of uncertainty in the markets.

Today as the dollar fell, gold prices briefly surged above $455 an ounce, the highest price since June 1988, before easing back.