China's move to switch reserves could raise pressure on dollar

Progressive sometimes are accused of having a "the sky is falling" mentality. Perhaps that is true. Sometimes. The thing is, it is important to evaluate each point on its own merits. It the following story, we hear two different perspectives, then we have to decide for ourselves which perspective is most likely to be valid.

The Times January 06, 2006

China's move to switch reserves could raise pressure on dollar
By Gary Duncan, Economics Editor

JOHN SNOW, the US Treasury Secretary, denied yesterday that China had America in an economic stranglehold as an announcement by Beijing that it will seek to diversify its vast currency reserves fuelled worries that the dollar will come under heavy pressure this year.

The decision by China’s State Administration of Foreign Exchange (Safe) that it will explore a wider range of ways to invest the country’s $769 billion (£437 billion) of currency reserves — the bulk of which are in dollars — could add to a series of factors exerting downward pressure on the US currency, economists said.

The dollar confounded widespread forecasts last year that it would succumb to a broad-based decline. But with the prospect of an early peak in US interest rates and a slowdown in the American economy already tipped by many to weigh on the currency, analysts said China’s move could only add to risks of a significant sell-off at some point this year.

Jim O’Neill, chief economist at Goldman Sachs, said that he already had a bearish view of the dollar, and Beijing’s decision reinforced that view. He expects a further 9 per cent fall of the dollar against the yuan this year, to 7.34 to the dollar, and a dollar drop of 7 per cent against the euro.

Nick Parsons, of Commerzbank, said that he did not expect the dollar to suffer any immediate impact, but that “over three to six months, we could well look back on this as a very important announcement [by Beijing]”. [...]

John Snow opines that there is not much to worry about. Mr. Snow, as you may recall, is a political appointee who replaced the independently-minded Paul O'Neill as Secretary of the Treasury. Mr. O'Neill was asked to leave in December 2002, and was told he was to announce that he was leaving in order to spend more time with his family. (He did leave, but he refused to whitewash the dismissal.) Mr. Snow's livelihood depends upon him saying what his boss wants to hear.

The other opinion was expressed by Jim O'Neill (no relation to Paul) and Nick Parsons. They are not so optimistic. For both of them, their livelihood depends upon saying what is correct.

So who are we to believe: the guy who gets memos telling him what is politically expedient to say, or the guys who could lose a ton of money if they are wrong? posted by : Joseph j7uy5 | link | | |
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