Thursday, December 7, 2006

China sounds alarm on falling greenback

Friday, December 08, 2006


China's central bank issued a warning Thursday about the risks of dollar weakness, piling fresh pressure on the US currency after a steep drop over the past few weeks.

The warning was contained in the full version of the central bank's 2006 financial stability report, which it posted on its Web site.

"If external capital stops flowing into the United States, a significant drop in the US dollar may occur with consumption and investment shrinking, interest rates rising and financial markets experiencing turbulence - endangering global financial and economic stability," the report said.

The central bank, holder of the world's largest foreign currency reserves, said more capital will flow into China as the US dollar weakens and fund managers dump dollar-denominated assets.

Inflows of cash have undermined efforts to cool growth in the world's fastest growing major economy and increased the risk that banks will be saddled with bad loans, the bank said.

The country's trade surplus, forecast by the government to swell 65 percent to a record US$168 billion (HK$1.31 trillion) this year, has flooded the economy with funds and sparked calls by trading partners for faster gains in the yuan. China's October money supply unexpectedly accelerated for the first month in five.

"Everyone's looking for excuses to get out of the dollar and bet on more Asian currency strength, and this provides it," said Claudio Piron, head of Asian currency research at JPMorgan Chase Bank in Singapore.

"It's providing support for all the Asian currencies."

The world economy has been enjoying the strongest sustained growth in 30 years, even as the US current account deficit steadily widens and surpluses grow in Asia and oil- producing countries. But the People's Bank of China said the longer the imbalances persist, the greater the risk of a disorderly adjustment and of damage to the world economy.

"If the US current account deficit continues to grow faster than GDP, then the investment value of US assets may be subjected to doubts and challenges and the willingness of investors to continue holding and buying US financial products may weaken," the central bank said.

After marking time for months, the dollar has now lost 2.5 percent against the yen in less than three weeks, 3.6 percent against the euro and 4 percent against the British pound.

The Chinese central bank also said it saw a chance that Asian and oil- producing countries would adjust their foreign currency reserve portfolios.

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