ft editorial:dollar scare reveals fragile support

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    11:06p ET Wednesday, February 23, 2005


    Dear Friend of GATA and Gold:


    The Financial Times editorial appended here
    is interesting for acknowledging that the
    U.S. dollar stays afloat only with the
    greatest assistance from foreign central
    banks and that the first central bank to
    start dumping dollars wins while the others
    are likely to lose.


    But the FT editorial is a bit dense for not
    acknowledging something else in regard to
    foreign exchange reserves. The FT says:


    "Diversification might not succeed in its
    objective of minimising capital loss. It all
    depends on what currency one diversifies
    into. The euro is no longer obviously cheap.
    If and when Asia revalues, the euro could
    even fall against the dollar. In this case
    the capital loss would be greater on euro
    holdings than on dollars."


    But of course central banks and everyone
    else seeking to diversify dollar holdings
    can also diversify into something that, by
    inflation-adjusted standards, is cheap. You
    know what it is, even if the World Gold
    Council would never suggest it and, even if
    it did come up, would just call it really
    nice jewelry.


    CHRIS POWELL, Secretary/Treasurer
    Gold Anti-Trust Action Committee Inc.


    * * *



    Dollar Scare Reveals Fragile Support


    Financial Times, London
    Comment and Analysis
    Thursday, February 24, 2005


    http://news.ft.com/cms/s/7468d91e-860b-11d9-b506-00000e2511c8.html


    Crisis over? Not really.


    For sure, the market overreacted to reports that the Bank of Korea
    wanted to reduce the share of dollars in its portfolio. What the
    Koreans actually said was that they want to diversify out of low-
    yielding US Treasuries into higher-yielding securities, which could
    include riskier US assets as well as non-US government bonds. And
    they intend to do so by diversifying the flow of reserves, not the
    $200 billion (£105 billion) stock.


    But while Tuesday's selloff was founded on error, it nonetheless
    exposed the underlying weakness of the US currency. If the mighty
    dollar can be rocked by a single paragraph in a report to the Korean
    parliament, something is amiss.


    That something is the dependence of the dollar on a handful of Asian
    central banks, which between them control $2,400 billion in
    reserves. These reserves are already large relative to the size of
    the Asian economies and getting bigger by the day. As they grow so
    does the incentive to guard against capital loss from further dollar
    depreciation.


    Very obviously, if all the Asian central banks were to start selling
    their stock of dollars the US currency would plunge. But such a
    generalised rout would also force the Asian currencies to appreciate
    against the dollar. If either Japan or China were to sell dollars,
    the effect would probably be the same. However, the first mid-sized
    country to bail out of the dollar might be able to get a good price
    for its assets and maintain its bilateral exchange rate, encouraging
    others to follow.


    But even if Asian central banks do not sell their stock of dollars,
    the US currency is not safe. With private appetite for US assets
    inadequate and volatile, the US relies on continued purchases by
    central banks to fund its current account deficit and acquisition of
    foreign assets by US residents. If their appetite dims, unless
    private flows soar, the dollar will still fall (and keep on doing so
    until the change in the relative price of imports and exports
    narrows the current account deficit to a sustainable level).


    Diversification might not succeed in its objective of minimising
    capital loss. It all depends on what currency one diversifies into.
    The euro is no longer obviously cheap. If and when Asia revalues,
    the euro could even fall against the dollar. In this case the
    capital loss would be greater on euro holdings than on dollars.


    Asian countries need more Asian assets. Again, in aggregate they
    cannot obtain them without forcing up their currencies, though
    individual countries acting alone could do so.


    In the end the only sure way to limit capital loss is to stop
    intervening and allow currencies to rise. The yen and Korean won
    have appreciated significantly since 2002. But while others remain
    pegged, such appreciation disrupts intra-Asian exchange rates and
    trade.


    The optimal solution is a co-ordinated revaluation, led by China.
    But while the Chinese economy thrives and inflation stays under
    control, Beijing has little incentive to agree.
 
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