IB FX View

PBOC Governor pours fuel on the dollar fire

Friday June 26, 2009

The week seems to be ending on a weak note for the dollar after the Governor of the People’s Bank of China repeated earlier calls for less reliance on the greenback and urged the IMF to widen the number of currencies it uses to hold international foreign exchange reserves. The dollar is lower across the board and at one point the euro rose above $1.41. Currently one euro buys $1.4060, while the dollar index is gently rebounding having reached 80 earlier this morning.


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To put today’s news in context, the PBOC posted its 2008 annual review on its website earlier today. The report was more than likely some time in the making and having already sounded off on this issue in March, Governor Zhou Xiaochuan is repeating earlier remarks. And while today’s comments are widely covered in forex land, they are at odds somewhat with a recent more relaxed tone between the Chinese government and the Obama administration. You’ll recall that treasury secretary Geithner recently paid a visit to Beijing to lavish his comments on a diversity of listeners as he sought to convince them that the growing budget deficit is not acceptable.

Governor Xiaochuan’s “demand” is that the IMF loosen the weighting of dollar’s in the calculation of special drawing rights or SDRs. These are settlement accounts and members are allowed to withdraw funds relative to their contributions. The long-time weighting of SDRs shows the dollar as the largest component at 64%. By including more currencies in the basket, the relative dollar weighting would be diluted. The Governor says that an international reserve currency delinked from sovereign currencies would help eliminate the inherent deficiencies created by their use. He wants the IMF to take more responsibility for the management of its members’ international reserves.

Currently the U.S. Treasury commands the greatest draw from overseas nations as a home for reserves. And as much as treasury prices and the value of the dollar keep reacting to stories such as that of today, the evidence fails to support that central banks and foreign governments are shunning either venue. According to Federal Reserve records, May’s data showing an increase of $68.8 billion was the third largest increase on record at 3.3% of official overseas holdings of U.S. debt.

In other economic news today, the dollar lost ground as income data pointed to some success in the recent stimulus spending. While job losses and a decline of 0.1% in wages and salaries in May kept incomes depressed, they were padded by fiscal adjustments, which created a boost to retail consumption, while simultaneously increasing the savings ratio to the highest since 1993.

Of course a weaker dollar feeds demand for gold and crude oil, which helps explain somewhat the rally to 80.63 U.S. cents in the value of the Australian dollar this morning. Growing optimism in a recovery in the Pacific region at least is also bolstering appetite for the unit.

The British pound rose against the dollar to $1.6476 despite a government report from the Land Registry that showed for the 13th straight month the average price of British homes declines. This is the overall and nationwide figure and one of perhaps four surveys. The others are run by mortgage lenders and at least a pair of these recently reported a blip upwards in home prices. Appetite today for the pound seems to be a function of loss of appetite for the dollar.

Elsewhere the dollar is giving back a lot of the gains it made earlier this week as a beneficiary of Swiss National Bank intervention. The dollar has so far lost 0.9% to Sfr1.0840 against the franc. Meanwhile the euro is moving in the opposite direction today as it buys Sfr1.5270. At its weakest point of the week the euro reached Sfr1.5381.

The Japanese yen continues to improve on Friday and so far has risen to 95.30 against the dollar. It’s also improved relative to the euro where the single currency now buys 134. Next week the big driver will be the widely watched quarterly Tankan survey from the Bank of Japan.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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