Long-term threat of ‘trade chaos’ cited

BARRIE MCKENNA theglobeandmail.com 11/28/06

WASHINGTON — Renewed fears that the Chinese central bank may be poised to start liquidating its $1-trillion stash of U.S. dollars briefly drove the greenback to a 20-month low against the euro and a two-year low against the British pound in trading yesterday.

The euro surged to $1.3172 (U.S.) against the greenback and the pound to $1.9469, before losing ground by day’s end. The loonie and the yen have also gained on the U.S. dollar in recent days.

The sudden weakness of the U.S. dollar began late last week, soon after Chinese officials suggested that holding a lot of dollars might be a losing investment strategy. Investors read that as a signal that the massive trade and financial imbalances between Asia and the U.S. may be about to unwind.

The chief worry is that if China’s central bank — the largest foreign holder of U.S. dollars — begins to unload its reserves, the dollar will plunge. With China’s yuan effectively pegged to the dollar, other leading currencies would move higher after the realignment.

There’s no evidence yet that’s what China is actually doing. But few investors want to be the ones left holding dollars when the plunge comes. “People are getting very nervous,” said Andrew Busch, chief foreign exchange strategist at BMO Nesbitt Burns in Chicago.

Full article: theglobeandmail.com