Dollar Suffers as Risk Appetite Soars
1 Jun 09 | FT
The dollar took a battering on Monday as hopes of economic recovery prompted an increase in risk appetite.
Emerging market currencies and high-yielding carry trade crosses – where units with low yields such as the dollar and yen are used to fund asset purchases carrying better yields – were in demand….
The pound rose 1.6 per cent to $1.6443 against the dollar.
Sterling was up 1.5 per cent against the euro at £0.8614 and 3 per cent higher versus the yen at Y159.
Purchasing managers’ data on manufacturing in the U.S. and eurozone improved but remained at levels indicating that activity was still contracting.
The euro climbed 0.1 per cent against the dollar to $1.4170 and was up 1.5 per cent versus the yen at Y136.98.
Much of the outperformance of emerging market currencies was down to the improving economic backdrop in China. >>>
A leading Chinese financial official on Monday rejected suggestions the U.S. dollar could be replaced quickly as the global reserve currency, as U.S. Treasury secretary Tim Geithner arrived in China on his first official visit.
“In the short term I don’t think we can find another currency to replace the U.S. dollar,” said Guo Shuqing, chairman of China Construction Bank and former head of the country’s foreign exchange administrator. “The U.S. dollar is the main currency because their economy is number one in terms of competitiveness, in terms of innovation.” Speaking in an interview with the Financial Times, Mr Guo also raised doubts about a proposal from China’s central bank governor, Zhou Xiaochuan, to replace the dollar with a “super-sovereign reserve currency” based on special drawing rights issued by the International Monetary Fund.
“We’ve had SDRs for many years but everybody knows they don’t work so well,” said Mr. Guo. “People worry about US dollars very much because of the imbalances in the current account but that has been the case for many years – they have had a deficit in the current account since the very beginning of the 1970s.”
The bulk of China’s total international investment position is held in U.S. dollar assets and only 6 per cent is in the form of direct investment.
Fears that U.S. moves to tackle the recession could undermine the value of the dollar have led to calls from senior Chinese officials, including Mr. Zhou, for more conservative fiscal policy and suggestions that the dollar be replaced as the world’s reserve currency. >>>
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