Udhay Shankar N wrote: [ on 06:25 PM 11/16/2007 ]
Another data point:
http://articles.moneycentral.msn.com/Investing/JubaksJournal/KuwaitKicksSandOnTheDollar.aspx
The U.S. dollar took a big hit last week. From
Kuwait. On May 20, Kuwait stopped pegging its
currency, the dinar, to the U.S. dollar.
The UAE is pondering this too.
http://www.khaleejtimes.com/DisplayArticle.asp?xfile=data/business/2007/November/business_November460.xml§ion=business
Some more fuel for the trend, from the biggest
and scariest participant of them all (as far as the US is concerned)
http://www.businessweek.com/magazine/content/09_23/b4134024721528.htm
China Thinks Beyond the Dollar
Shaky U.S. finances that put China's investment
at risk are fueling China's crusade to undo the dollar's dominance
By Steve LeVine and Dexter Roberts
Beijing's quest to dethrone the dollar as the
world's dominant currency is a natural strategy
for hard-line Chinese leaders bent on
undercutting U.S. influence in the world. Yet
here's a twist: A key figure behind this policy
drive, Chinese central banker Zhou Xiaochuan, is
actually an economic reformer and internationally
respected economist. And Zhou's criticism of
America's runaway public finances and the
dollar's postwar reign in global trade and finance isn't so easily dismissed.
Beijing is nudging trading partners to use its
currency, the yuan, in trade transactions.
Meanwhile Zhou, who has served as governor of the
People's Bank of China since 2002, backs the
creation of a "super-sovereign reserve currency"
managed by the International Monetary Fund that
would challenge the dollar's power. True, the
greenback's exalted status isn't in immediate
danger. However, an international campaign led by
China to move away from a dollar-centric global economy is gathering momentum.
In recent days, worries about America's fraying
public finances and dollar weakness have unnerved
Treasury bond investors the world over, not to
mention Zhou and Chinese Premier Wen Jiabao. Much
of China's national wealth, about 70% of its $2
trillion in foreign reserves, is denominated in dollars.
Zhou earned his doctorate in economics from
Beijing's prestigious Tsinghua University and
knows that a bigger international role for the
yuan is a fantasy unless China lets its currency
trade freely and lifts capital controls on money
going in and out of the mainland.
Instead, the Chinese economy is now somewhat
hostage to economic policies set in Washington.
The U.S. budget deficit has exploded, and the
Federal Reserve is effectively printing money to
buy Treasury bonds. That's a recipe for a weak
dollar, a bond glutand a nasty financial hit to
Chinese holdings of U.S. Treasuries.
Well-informed Chinese now realize Beijing's
strategy of keeping the yuan artificially low vs.
the dollar to stoke exportsand then recycling
export earnings back into the U.S. Treasury
markethas backfired. Chinese blogs rant about
"irresponsible investment policies of the Chinese
government, which also happen to be subsidizing
the U.S. economy," says Wenran Jiang, an
associate political science professor at the University of Alberta.
LATIN CONNECTION
To reduce its exposure to U.S. economic policy,
Beijing is forging currency swaps with Asian and
Latin American nations, contracts that provide
their central banks with yuan to use in trade
with China. More ambitiously, Zhou thinks the IMF
should create a new international currency that
would be valued against a basket of existing
currencies, such as the dollar, euro, and yuan.
Instead of recycling unwanted dollars into U.S.
Treasuries, a central bank would deposit them in
an IMF account offering an interest rate. In
theory, the new reserve currency would be more
stable than the dollar because it would be
"disconnected from economic conditions and
sovereign interests of any single country," Zhou
wrote in an essay published on China's central bank Web site in March.
Such a grand scheme, now backed by Russia and
Brazil, is a long shot. Yet Zhou has tapped into
resentment about the hugeand uniquefunding
advantages America enjoys. The U.S. can borrow
and trade in its own currency, while other
economies with dollar assets must worry about
currency swings or U.S. policy shifts. That's why
China's currency crusade may carry on long after the global recession subsides.
LeVine is a correspondent in BusinessWeek's
Washington bureau. Roberts is BusinessWeek's Asia
News Editor and China bureau chief.
--
((Udhay Shankar N)) ((udhay @ pobox.com)) ((www.digeratus.com))
