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China Dumps the Dollar as Yields Sink
China cut its holdings of Treasury notes and bonds by the most ever in June, instead favoring the debt of Europe, Japan and Korea. The move has fueled speculation that plummeting U.S. yields are driving away the Asian giant, which has ambitions for its currency, the yuan, to replace the dollar as the world's main reserve currency.
China's holdings of long-term Treasuries fell by $21.2 billion in June to $839.7 billion, a U.S. government report showed recently. Total Chinese investment in U.S. debt declined 2.8% to $843.7 billion, the smallest in a year, following a 3.6% slide in May.
The shift comes as President Barack Obama increases U.S. debt to record levels, making it harder to finance sales to sustain the U.S. economic expansion.
The Fed's Treasury Purchase Plan is Just Further Proof That It's in the Denial About the Dollar
This week's decision by the U.S. Federal Reserve to buy Treasuries in an effort to prop up borrowing is further proof that the economy is worse off than policymakers would have us believe. But more than that, the Fed's Treasury purchase plan is just one more reason for investors to anticipate inflation and take steps to protect their money from it.
In case you missed the news, here's what happened…
The Federal Reserve on Tuesday announced that instead of allowing proceeds from maturing mortgage bonds to disappear from its balance sheet, the central bank would take the "modest" step of using them to invest in new Treasuries.
In plain English, that means that the Fed is reinvesting into U.S. Treasuries the money it would otherwise bank from maturing mortgages.
Its goal is very simple: to keep long term interest rates from rising.
The Case for the Yuan: Why China's Currency Isn't the Problem Policymakers Make it Out to Be
By allowing the yuan to appreciate, China at least temporarily placated foreign trade partners that had expressed concern about the currency's value. However, the decision has done little to quell criticism from many U.S. policymakers and trade groups who are angry that the Obama administration refuses to brand China a "currency manipulator."
Still, while the yuan does need to appreciate, critics in the United States should remember that the dollar too is flawed, and that the uneven relationship between the two currencies has often worked to America's advantage.
Treasury Secretary Timothy Geithner has thrice declined to tag China as a currency manipulator in his biannual report to Congress. Geithner even delayed the release of the most recent report to give China more time to adjust its policy. That move paid off in June when just days ahead of the Group of 20 (G20) leaders' summit in Toronto, Beijing announced that it would allow the yuan to appreciate against the dollar. Since then, the currency has risen about 1% against the greenback.
Geithner, who made two visits to China in the spring for closed-door talks with top officials on the issue, called the policy shift a "significant step" in his report, but said the yuan remains "undervalued."
What matters now is "how far and how fast the renminbi [or yuan] appreciates," Geithner said, adding that the United States "will closely and regularly monitor the appreciation" of the currency.
Dollar Bulls Retreating From Bets Against Euro
The biggest surge in the value of the U.S. dollar since 2005 appears to be waning, as traders retreat from bets against the euro and other currencies.
The number of contracts hedge funds and other large speculators hold betting on a rise in the dollar versus other currencies declined by 70% to 49,335 in the week ended June 22 from a June 8 peak of 163,085, according to an analysis of Commodity Futures Trading Commission data conducted by Bloomberg News.
With concern that Europe's fiscal crisis will cause a nation to default easing, the Dollar Index – which measures the currency against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona – is down 3.5% since June 7.
Money Morning Chief Financial Strategist Keith Fitz-Gerald thinks there may be an opportunity to cash in on the dollar's recent weakness in view of the increasing flows of capital into Asian markets.
Is it Time to Bet Against the U.S. Dollar?
The U.S. dollar has been one of the world's strongest currencies in the first part of 2010. But, is the greenback really the bet choice for safety, quality and security? Read this report to find out why it's time to bet against the dollar…
After a Strong First Half, Is the U.S. Dollar Headed for a Reversal?
In spite of an assortment of economic uncertainties at home, the U.S. dollar has been the star of the currency world for most of 2010. Spooked by persistent and seemingly insurmountable debt problems in the European Union – and the specter of unsustainable growth and potential inflation in China – investors fled European and Asian currencies for the perceived relative safe haven of the dollar.
But the U.S. dollar may have topped out.
Let me explain …
From Leader to Laggard: Is it Time to Bet Against the U.S. Dollar?
The U.S. dollar has been one of the world's strongest currencies in the first part of 2010, posting double-digit gains through the end of May.
And little wonder. The Greek debt crisis continues to threaten Europe's overall health, and could unleash an entirely new contagion on the rest of the global economy. Then there's China, – the engine of world growth during much of the financial crisis – which now appears to face the near-term triple threat of slowing growth, accelerating inflation and workplace unrest. Add in concerns about commodity prices and global debt levels and it's easy to see why currency investors have sought the safe haven of the U.S. dollar.
In short, it appears that "everybody" knows the greenback is the best choice for safety, quality and security.
But is that really the case? To me, the dollar is looking more and more like a colossal short that could wind up being one of the biggest moneymakers of the year for traders gutsy enough to take a stand.
U.S. Dollar 'Extremely Overbought' Says Market Researcher
The euro, which made huge gains against the dollar in the wake of 2008's financial crisis, has come plummeting back to earth amid fears that the Greek credit crisis would spread and undermine the European Union (EU). The euro's decline has meant a sharp rebound for the dollar, which according to respected market researcher Bespoke Investment Group LLC, is now "extremely overbought."
The euro has plunged some 21% versus the dollar from its all-time high back in 2008, Bespoke says. And while it is still above its historical average of $1.183, it is currently less than 2% above its 2008 low.
Meanwhile, the U.S. Dollar Index has rallied over 14% since its short-term lows in November, and it is up 3.5% this week alone.
Washington – Not China – Is the Real Manipulator Here
SHANGHAI, People's Republic of China - China just posted its first monthly trade deficit in nearly six years, a $7.24 billion shortfall for March that essentially torpedoes Washington's argument that the Asian giant is a "currency manipulator" of the worst kind.
The Obama administration's assertion that China is artificially keeping the yuan undervalued to gain a global competitive advantage isn't just misguided: It actually demonstrates that Washington lacks even a basic understanding of global economics. Given that the same U.S. leaders who have been pushing to hang this manipulator label on China and impose sanctions are the same ones who tried to end the financial crisis by creating a river of debt that will haunt us for years, I can't say that I'm surprised.
As the U.S. argument goes, pegging its currency to the dollar gives China a distinct advantage when it comes to less-expensive manufacturing and a strong export market. The implication is that somehow this is negatively impacting our economy, or – in a variation of the same logic – holding back our recovery. Washington points to the massive trade deficits we regularly run with that country as evidence of China's currency-market wrongdoing.
In reality, China's pegged currency has done two things. First, it's allowed the United States to keep its inflation rate at a much lower (and more-manageable) level than it should have been in view of the $14 trillion in debt that this country has taken on.
And, second, it's allowed China to fuel its own stimulus package while at the same time assuming a meaningful role in the ongoing global recovery.