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Chinese Officials Torpedo Dollar

The troubled U.S. dollar sank to new lows today, partly because of comments made by Chinese officials at a conference in Beijing. Cheng Siwei, vice chairman of the Standing Committee of the National People’s Congress, said that China should shift more of its $1.43 trillion of currency reserves into “stronger currencies,” such as the euro, to offset “weak” currencies like the dollar. Xu Jian, a central bank vice director, added that the dollar is “losing its status as the world currency.” Earlier today, the U.S. currency fell to a record versus the euro and is at its weakest level since 1981 against the pound. The greenback also declined to its lowest level against the Canadian dollar since the end of a fixed exchange rate in 1950 and stands at a 23-year low against the Australian dollar.

Larry Smith, who manages $400 million as chief investment officer at Third Wave Global Investors, told Bloomberg today that, “The big issue on any currency is if its rate of depreciation is so fast that it scares away all capital, and the announcement that we heard from China sort of feeds those fears.” Dustin Reid, foreign exchange strategist at ABN Amro in Chicago, told the Wall Street Journal today that statements from the Chinese officials remind us of the possibility that China and other countries with huge dollar reserves could start diversifying out of greenbacks heavily, starting in 2008. According to MarketWatch this morning, Vincent Chaigneau, the head of fixed-income and foreign-currency strategy at Societe Generale, wrote in a note to clients that:

As if ballooning U.S. credit/housing crunch data, back-to-back Fed cuts and soaring oil prices weren’t enough to stun the U.S. dollar, now we have the specter of central-bank reserve asset diversification out of U.S. dollars to contend with.

It should be noted that Chinese investors have reduced their holdings of U.S. Treasuries by 5% to $400 billion in the five months prior to August, the last time figures were released. China Investment Corp., which manages the nation’s $200 billion sovereign wealth fund, said last month it may deploy more of the nation’s reserves for investment purposes.