Forex Reader

– By Pushpa Sathish, Staff Writer

Is the dollar on its way out as the world’s dominant currency? If you were to take recent events into consideration, it would look that way. The UAE, Russia, Switzerland, and Venezuela are just a few countries that have decreased the dollar holdings in their foreign exchange reserves. China, the world’s largest forex holder, is being urged by analysts and economists to diversify its portfolio, and reduce its risk by dropping the dollars and picking up euros. And to top it all, 2006 saw the British pound appreciating 11 percent against the dollar, while the euro rose 14 percent.

But wait, let’s hear what the defense has to say before pronouncing a verdict. The decrease in dollar holdings by the central banks of various banks is nothing but a move to diversify reserves, and not a sign that the dollar is losing face as currency, says David Powell, currency analyst at IDEAglobal.

The impact on the dollar when central banks invest in other currencies is not lasting and does not influence exchange rates for a prolonged period, according to Edwin Truman, senior fellow at the Petersen Institute for International Economics who served for more than two decades as the director of international finance for the Federal Reserve.

But the explanation that holds the most water is the one that follows – any country that holds a large amount in U.S. Treasury securities will certainly not wish to cause the dollar to decline significantly. China, which holds the second-largest reserve of Treasury securities ($345 billion), will find that selling its dollars ($700 billion) will play spoilsport in its attempts to manage the appreciation of the yuan against the greenback. If the value of the dollar drops too much, China’s exports will become less competitive in the United States, its holdings will decrease, along with the lending ability of its banks.

Nigel Gault, chief U.S. economist for Global Insight, sums it up with these words,

"The dollar is still the world’s No.1 currency, and it’s going to stay that way. The euro is gradually going to become more important, but I don’t see it becoming more important than the dollar."

The weekly statistical supplement of RBI dated 8 December 2006, has reported that the Forex reserves have reached $ 175.489 billion as on 1 December 2006. This figure is up by $ 2.707 billion on 24 November 2006. On 24 November 2006 the Forex reserves had been $ 172.78 billion.

Rise in foreign currency and assets and a rise in reserve position in the IMF are being seen as the possible reasons for the growth in Forex reserves. During the same time frame, foreign currency and assets grew to $ 168.44 billion. This is a rise of $ 2.38 billion. The special drawing however remained at its previous level - $ 1 Million. Myiris.com reports:

Foreign currency and assets during the week rose by USD 2.38 billion to USD 168.44 billion. Foreign currency assets expressed in USD terms include the effect of appreciation/depreciation of non-US currencies (such as euro, sterling and yen) held in reserves. The reserve position in the IMF deteriorated by USD 103 million to USD 549 million during the period under consideration.”

– By Pushpa Sathish, Staff Writer

North Korea is in the news again, and the headlines are not positive. Following the furor it caused with its nuclear tests, the Asian country is now in the limelight for its alleged counterfeiting activities. According to a report issued by the U.S. Treasury, the counterfeit dollars, dubbed supernotes, are being churned out with the blessings of the North Korean government.

The racket has been going on since 1989, with at least 22 million notes having been circulated over the years. The report says that $50 million worth of these have been seized by U.S. agents. Interpol has been doing its bit to stop this fraud by issuing warnings when North Korea attempted to purchase printing equipment to aid its counterfeiting efforts.

The U.S government severed ties with a Chinese bank in Macau last year after it was suspected to have had a hand in distributing the supernotes. VOA News reports:

“We very clearly have been quite concerned about North Korea’s illicit activities, including counterfeiting of U.S. currency,” said U.S. State Department spokesman Sean McCormack. “And the United States is going to continue actions it deems appropriate to protect itself in this regard to protect its currency. This is a very basic function of government - protecting its own currency. We think that every state around the world would take steps to do so.”

A slowdown in the economy is not always enough to check inflation, as proved by the appreciation in the dollar. The greenback rose against the euro on Friday even as the U.S. Commerce Department reported that consumer spending adjusted for inflation dropped 0.1 percent in August, the first fall in almost a year. Inflation remained a high 2.5 percent. M Live reports:

Weaker consumer spending could herald a weakening of economic growth, a trend that usually weakens a currency. Central banks use higher interest rates to combat inflation, and the dollar has profited from a series of rate increases in the past two years.

The US dollar moved higher against the yen and euro in the afternoon trading in Singapore. Dollar’s rise has been attributed to the focus of the market on the slated release of the US retail sales data for last month. The dollar was at 117.65 yen, up from 117.53 yen in Sydney trading two hours ago. The euro was at 1.2687 USD, down from 1.2693 USD in the Sydney trading. It is significant to note that the US dollar is doing a steady progress over the past couple of weeks.

Read my previous post titled “Leverage Trading and Low Transaction Costs” to know about leverage trading.

The US dollar was lower in the afternoon trading session in Singapore. It succumbed to accelerated gains in the euro, which hit a new record high against the yen earlier. The dollar was at 117.01 yen, down from 117.12 yen in Tokyo trading session. The euro was at 1.2813 USD, up from 1.2775 USD in Tokyo trading session. The euro has registered a sharp increase by reaching a new record high of 149.90 yen. In the afternoon, the euro’s gains against the yen pushed it higher against the dollar and helped keep the dollar subdued against the yen. The last meeting of the Federal Open Market Committee could affect the US dollar further.

Read my previous post titled “The US Federal Reserve Loosened Money Control” for more information about the guidelines laid down by the US Federal Reserve.

China is slowly responding to the West’s demand to let its currency appreciate, the results of which were seen in the yuan’s strongest ever showing against the US dollar. Following the central bank’s hike in lending rates by 27 basis points, the yuan rose to 7.9642 against the dollar. Forbes reports:

On Jan 4, China launched an OTC system for the interbank foreign exchange market, allowing market participants to make currency trades on credit without the intervention of a third party. Previously it relied exclusively on an automatic price-matching system, overseen by a centralized government trading center, known as the exchange-traded market.

The US dollar weakened against most major currencies. It hit a two-month low against the euro amidst the reports that the US economy is slowing down. The dollar’s decline has been attributed to the report that the Federal Reserve might leave interest rates unchanged again next month. The US economy is likely to cool enough to prompt a Federal Reserve interest rate cut in the second half of 2007. One of the main beneficiaries of the dollar selling was the euro, which also traded at a record high against the yen. The euro climbed to $1.2939, gaining 0.7 percent as compared to last week.

Read our previous post titled “Dollar Falls as US GDP Growth Drops” to know more about the decline of the US dollar.

With the Federal Reserve holding interest hikes, the dollar is set to fall over the rest of this year, according to Jack Rosenthal. The Sydney-based currency strategist says that consumer confidence is weakening in the United States following surges in the prices of gasoline, petroleum-based products and health care. A survey by the University of Michigan endorses this opinion and showed that the dollar was set for a decline against the euro and the yen all this week. Consumer confidence index slipped to 83.8 in August from 84.7 in July, says Bloomberg, a figure that is still higher than the monthly industry average of 88.1 since 1978 when data was first compiled. Bloomberg reports:

Excluding food and energy costs, so-called core consumer prices rose 0.2 percent in July, after 0.3 percent gains in the previous four months, the Labor Department said August 16. The index of leading economic indicators fell 0.1 percent in July, the Conference Board said yesterday.

In the course of tracking 16 major currencies this week, Bloomberg found the New Zealand dollar to have gained the most against the U.S. dollar. The Kiwi currency gained 1.3 percent, with the Mexican peso following in the list with a gain of 0.85 percent.

The worst performer was the Norwegian krone which weakened by 2.4 percent. The Japanese yen followed with a loss of 1.61 percent.

Follow this link to see how the other currencies fared.