-Caveat Lector-
Begin forwarded message:
From: [EMAIL PROTECTED]
Date: January 28, 2007 10:19:16 PM PST
To: [EMAIL PROTECTED]
Cc: [EMAIL PROTECTED], [EMAIL PROTECTED], [EMAIL PROTECTED]
Subject: Uncle Sam's Greenbacks May Bounce Like Rubber Checks
China Says Major Shift on
Dollar Policy Coming
Financial Intelligence
By John Browne
http://rense.com/general75/fchi.htm
January 23, 2007
Some very worrisome news came out of China this Saturday - but it
got a little more than a blip in the U.S. press.
At a high-level financial conference this past weekend, China's
Premier Wen Jiabao said, "China would actively explore and expand
the channels and methods for using [its] foreign exchange reserves."
Considering that the bulk of China's reserves are in U.S. dollars,
it should send tremors about the future of the greenback.
The dollar has been reeling in recent years. A shift by China out
of dollars -- as Wen is hinting -- could be catastrophic.
China's reserves recently surpassed Japan's -- now exceeding $1
trillion. Some 70% of these reserves -- more than $700 million --
are in dollars.
Interestingly, The Wall Street Journal carried this critical story
on page A7 of Monday's editions with this pleasant spin headline:
"China Shift on Reserves Isn't Likely to Hit Dollar."
Perhaps I am missing something. China keeps most of its reserves in
dollars -- and its leader just announced they plan on diversifying
their portfolio. This means it won't affect the dollar?
It is of note that the Financial Times placed its report on the
China development smack in the center of Monday page one. Why would
U.S. media wish to play down such an important item?
While we believe that in the short-term the dollar may not be hurt
-- the item should send tremors down the backs of U.S. dollar
investors planning to hold the greenback over the long-term.
The Journal reported that Wen's statement was the "highest-level
confirmation yet that China is thinking actively how it can use its
reserves, which have increased more than 6 times since 2000 and
made China one of the worlds largest holders of U.S. Treasury bonds."
Later the article observed that, ". . . currency traders are
hypersensitive to any signs Beijing is losing its appetite for the
U.S. currency."
The FT went on to observe, "This policy switch opens the way for
China, which has been largely passive in managing its money to
establish an agency akin to Singapore's government."
As I wrote in my Financial Intelligence email in December and in
our sister publication, Financial Intelligence Report, as the U.S.
dollar depreciates, China is actively reviewing its holdings of gold.
When China resumes, or even announces its intention to resume, its
purchases of gold, expect the price of gold to respond, as we have
constantly warned, possibly in a major manner.
Of course, we believe it is not in China's short-term interests to
disrupt the currency markets or the U.S. dollar, of which it holds
some $700 billion.
But, in the longer-term, we believe China will use all its
strengths, including economic and military to further its path
towards super power status.
In this respect, we note last week's news (given a low profile in
our mainstream media) that China had shot down one of its own
defunct satellites, 500 miles out into space, at the same height as
U.S. military satellites. What sort of message does that send to
any observant investor or military strategist throughout the world?
To us it means that China is already on the march to super power
status and is our main challenge, even in times of peace.
We urge our readers and investors to pay great heed to the recent
announcements and especially actions of the Chinese, even if buried
deeply in our news media.
We believe that China's actions are set to influence such key items
as the U.S. dollar (and therefore U.S. interest rates), world
commodity prices, gold, and U.S. defense strategy and spending.
==============
OPEC Dumps $10.1 Billion of Treasuries as Oil Tumbles
By Bo Nielsen and Daniel Kruger
http://www.bloomberg.com/apps/news?
pid=20601009&sid=aqnC4ssoiBFc&refer=bond
Jan. 22 (Bloomberg) -- OPEC nations are unloading Treasuries at the
fastest pace in more than three years as crude oil prices tumble,
sending bond yields higher.
Exporters including Indonesia, Saudi Arabia and Venezuela, sold 9.4
percent, or $10.1 billion, of their U.S. government debt securities
in the three months ended in November, according to Treasury
Department data. Members of the Organization of Petroleum Exporting
Countries last sold Treasuries for three straight months in June 2003.
Oil producers have surpassed Asian central banks as the largest
pool of global savings, accumulating an estimated $500 billion in
2006 alone, according to research by Pacific Investment Management
Co. The sales in that three month period mark a reversal because
during the previous 17 months, OPEC countries had boosted their
holdings of U.S. government bonds by 70 percent to $97 billion,
Treasury data show.
``There will be a significant sell-off,'' Joseph Stiglitz, a Nobel
laureate and economics professor at Columbia University in New
York, said in an interview. ``Medium-term and long-term yields will
go up.''
Oil producers, including non-OPEC countries, have disclosed almost
$200 billion of U.S. government, corporate and agency bonds, said
Ramin Toloui, who helps manage about $641 billion for Newport
Beach, California-based Pimco, a unit of Munich-based Allianz SE.
The holdings are split about evenly between securities due in less
than a year and those with longer maturities.
Higher Yields
Treasury 10-year note yields fell one basis point to 4.77 percent
as of 9:05 a.m. in New York. The price of the 4 5/8 percent note
due in November 2016 rose 3/32 to 98 29/32. Yields on two-year
notes fell 1 basis point to 4.91 percent. Bond prices move
inversely to yields.
OPEC members were selling Treasuries as crude prices declined 34
percent from a record high of $78.40 a barrel in July. They are
reducing demand for U.S. government bonds at the same time as
central banks from China to Romania say they want to cut holdings
of dollar-denominated assets.
For every $10 drop in the price of a barrel of oil, OPEC members
adjust Treasury holdings by about $34 billion, according to
estimates by Michael Pond, an interest-rate strategist in New York
at Barclays Capital Inc.
Yields on the benchmark 10-year note have climbed 35 basis points
from a 10-month low in December as economic data on housing and
employment suggested the Federal Reserve would not cut its target
rate for overnight loans between banks from 5.25 percent before June.
Investing `Petrodollars'
Short-term yields have remained above those on longer-term
securities since mid-August. That situation, known as an inverted
yield curve, has occurred only 11 percent of the time in the past
two decades, according to Bloomberg data. Traders watch that
difference because four of the past five recessions have been
preceded by inverted yield curves.
``The pickup in oil revenues and the recycling of the
petrodollars'' was one reason for 10-year yields falling as low as
4.33 percent last year, said George Goncalves, a fixed-income
strategist in New York at Bank of America Corp.
`Money to Invest'
OPEC export revenue will decline by about $42 billion by the second
quarter, from a peak of $126 billion in the third quarter of 2006
as oil prices tumble, according to estimates from commodity
analysts at Charlotte, North Carolina-based Bank of America. Crude
for February delivery fell $1 last week to $51.99 a barrel on the
New York Mercantile Exchange.
``Lower oil prices mean less inflation pressure, but that doesn't
seem to be going on,'' said Stiglitz of Columbia. ``The dollar has
been subjected to a great amount of exchange-rate volatility, and
it's not a good store of value anymore.''
OPEC countries increased holdings of U.S. government bonds by 115
percent from 2002 to 2006 when the price per barrel rose almost
tripled, according to Treasury data.
They still hold more Treasuries than in 2005, when oil prices
jumped 41 percent.
``Oil prices are still high compared to the long-run average, and
that leaves the oil-producing countries with money to invest in
U.S. Treasuries,'' said Torsten Slok, an economist at Deutsche Bank
AG in New York.
Deutsche Bank estimates Middle East countries will stop investing
in U.S. securities should oil decline to $30 a barrel. Oil
averaged $33.28 a barrel for the 10 years ended in 2006.
Foreign Reserves
The oil exporters in the Middle East, Asia, Africa and South
America bought a monthly average of $2.5 billion of U.S. fixed-
income securities in the 12 months ended in May 2005, when crude
oil averaged about $42 a barrel, Goncalves said. Purchases jumped
to $7.3 billion a month from June 2005 through August 2006, when
oil averaged about $60 a barrel, he said.
``When you bring the oil price down, that's going to take a lot of
excess money off the table,'' said Andrew Brenner, head of global
fixed income for New York-based Hapoalim Securities USA, which has
$70 billion under management.
Only Japan, China and the U.K. own more Treasuries than the 12-OPEC
nations, according to Treasury data released last week. The OPEC
data doesn't include securities owned by Russia and Norway, which
account for 40 percent of oil producer reserves, according to
Toloui at Pimco.
Central bankers in oil producers Venezuela, Indonesia and the
United Arab Emirates have said they will invest less of their
reserves in dollar assets.
China, the second-largest holder of U.S. debt, also is cutting back
holdings. The central bank, which owned $346.5 billion of
Treasuries as of November, trimmed purchases by 1.7 percent in the
first 10 months of 2006, Treasury figures show.
``The Chinese are slowing down their buying, so that leaves a big
hole after the oil money,'' said Brenner at Hapoalim Securities.
To contact the reporter on this story: Bo Nielsen in New York at
[EMAIL PROTECTED] ; Daniel Kruger in New York at
[EMAIL PROTECTED] .
Last Updated: January 22, 2007 09:09 EST
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