DOLLAR FALLS AS CHINA REVEALS RECORD STOCKPILES / THE FINANCIAL TIMES ( RECOMMENDED READING )

Dollar falls as China reveals record stockpiles

By Peter Garnham

Published: July 15 2009 11:34

The dollar fell to its lowest level for a month on Wednesday as China revealed it had amassed record cash stockpiles,, while improving investor confidence stemmed haven demand for the US currency.

Analysts said positive earnings surprises from Goldman Sachs, the US bank, and Intel, the chipmaker, had boosted risk appetite, pushing investors away from the relative safety of the dollar and into riskier assets.

Furthermore, news that China’s foreign exchange reserves, the world’s largest, had grown by a record $178.3bn to $2,130bn in the second quarter also weighed on the dollar.

Analysts said the largest increase in reserves was in May, when the dollar weakened sharply as Treasury yields in the US rose.

Fear of a weaker dollar contributed to inflows to China, sparking offsetting intervention by the Chinese authorities to stem strength in the renminbi.

Ashley Davies at UBS said over the long term China’s policies were clearly unsustainable and supported his view that the dollar would structurally weaken over 2010 and 2011.

He said the rapid reserve accumulation explained China had been more vocal of late in calling for an alternative reserve currency.

But Mr Davies added that in the short term, the sheer pace of accumulation would suggest that China was having difficulty in diversifying its FX stockpiles.

Analysts estimate that the Chinese authorities hold about 65 per cent to 70 per cent of their reserves in dollars, with the rest in other currencies including the euro, pound, yen and perhaps the Australian dollar. Thus rapid accumulation of dollars by the Chinese authorities puts downward pressure on the US currency as they seek to maintain the balance within their reserves.

“If the bulk of the intervention was in dollars, then China may need to quietly accelerate diversification going forward, benefiting other major currencies such as the euro, yen and Australian dollar,” Mr Davies said.

By midday in New York, the dollar index, which tracks its progress against a basket of six major currencies, fell 0.9 per cent to 79.432, its weakest level since mid-June. The dollar fell 0.9 per cent to $1.4095 against the euro, lost 0.8 per cent to $1.6441 against the pound and dropped 1.2 per cent to SFr1.0749 against the Swiss franc.

Commodity-linked currencies also advanced against the dollar, with the Australian dollar rising 1 per cent to $0.8020, the Canadian dollar climbing 1.1 per cent to C$1.1200 and the Norwegian krone gaining 1.1 per cent to NKr6.3815.

The dollar was 0.3 per cent stronger at Y93.87 against the yen, however.

Copyright The Financial Times Limited 2009