On Christmas day, Bloomberg reported that China had reduced its purchases of
U.S. Treasuries by some 1.7 percent in the first 10 months of 2006.
This may not sound like much, but it equates to some $12 billion, based upon
China's $710 billion holding of U.S. dollar denominated assets. It is widely
thought that it reflected a diversification into the Euro and European debt
markets. As such, it counts double ($24 billion, net), with a $12 billion drain
on dollar assets and $12 billion boost to Euro assets.
This move preceded the arrival of a heavily protectionist Democratic Congress.
It is therefore most probably a result of a decision based on financial
prudence, rather than political pressure.
The fact that this major item of "psychological" news was announced on Christmas
day, when most major markets were closed, supports the view that the move was
basically non-political. It is also history, and does not affect today's market
directly.
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Yesterday, Bloomberg reported that the United Arab Emirates (including Abu Dhabi
and Dubai) would switch some 8 percent of its U.S. dollar reserves into euros.
Again, at some $2 billion, this does not appear massive. But it counts double in
favor of the euro.
[Editor's Note: Can Ben Bernanke avoid the coming currency crisis?
Go here now.]
According to the Bank of International Settlements (BIS), the share of dollars
as a percentage of OPEC foreign currency reserves fell in the first half of
2006, by 2 percentage points from 67 percent to 65 percent.
Last week, we drew your attention to the fact that Venezuela was to join Iran in
accepting, not dollars, but euros exclusively in payments for its oil. Of
course, their leaders are decidedly unfriendly to the U.S. and would much like
to see a run on the U.S. dollar amid chaos in the capitalist currency markets.
None of these figures are large, when looking at the total foreign exchange
market, but they are at the margin and indicate an important move, both current
and past, against a dollar that is under pressure.
The problem is that such actions by a few may soon lead to a trend among other
nations to increase their diversification away from the U.S. dollar.
[Editor's Note: Protect yourself from the inflation lie.
Go here now.]
The all-time trade-weighted low for the U.S. dollar was 80.39, on Dec. 31, 2004.
Today, it is trading just above that important support level at around 83.61.
As we write, most major decision makers are on holiday and markets are quiet, as
normal at this time.
However, as we look into 2007, we see increasing downward pressure on the
dollar.
In addition, it appears that despite a slowing economy with disappointing gains
in Christmas sales, the residential housing market may be bottoming out.
If this is true, we see the Fed remaining on an interest rate hold for some
considerable time.
We have said this consistently and now feel that the Fed could even be forced to
switch policy and defend the dollar as we move into 2007. This could entail an
increase in Fed rates in early 2007.
We note that the 10-year Treasury yield has risen from 4.40 percent (Dec. 1,
2006) to 4.72 percent today. This 32 basis-point rise in yield indicates that
some bond investors may now be in agreement with our long forecast rise in Fed
rates.
Despite this depressing view, we would like to take this opportunity to wish all
our readers a very happy and prosperous New Year.
Editor's Notes:
