Collap$e. Where Goes the Dollar?

Time to End Our Dollar Dependence The Chosun Ilbo

Late last year I flew into Belgium, the capital of the European Union. The moment I saw the notice "1 EURO=U$1.67" at the Brussels Airport money exchange, I sighed: the dollar had depreciated so much. The standard exchange rate that day was one euro for $1.45, but the cash buying rate is naturally higher because of transport and holding costs. In any case, the euro-dollar exchange rate that day was excessively low for the dollar.
I cursed myself for having exchanged my won for dollars. I took a sizable hit on the exchange, and I wasn't happy. To make matters worse, I invited ill luck and embarrassed myself. Just as I was collecting my euro notes at the exchange counter, I noticed a different rate on my receipt: "1 EURO=U$1.70." This was more expensive than the posted rate, so I complained to the teller. But actually I had found the source of the trouble. "I'm offended that you seem to have overcharged me," I protested. The response left me speechless: "That exchange rate was posted an hour ago; the dollar has weakened since then... If you don't want to exchange, you can get your dollars back any time."

The U.S. dollar is not on the list of foreign currencies that world businesses are buying these days. Most popular in Southeast Asia is the Chinese yuan, and in world exchange markets the Swiss franc, euro, Japanese yen and Canadian and Australian dollars are attractive. These currencies grow more valuable just by holding on to them, so everyone is eager to buy them.

With us, however, the reverse is true. A junior local bank official criticized our lack of foreign exchange consciousness by saying, "Koreans prefer dollars either when they visit China on business or when they tour Europe." A foreign exchange dealer at a foreign bank commented, "Multinationals prepare their asset portfolios in various currencies including the dollar. But most local corporations, except a few conglomerates, have yet to free themselves from transactions in U.S. dollars only."

As our average foreign exchange consciousness lags behind that of the citizens of our global rivals, either a rise or a fall in the value of the dollar causes us big problems. Though a weak global currency, the dollar is strong against our won. The dollar that fell to W900 in October last year recently spiraled up to W980.

A strong dollar is evidently good news for our export businesses, but we miss out in many other areas. "The dollar was generally weak last year. As a means of hedging, we sold hundreds of millions of dollars in futures. As the dollar has strengthened recently with the contract deadline approaching, we've effectively sustained a loss of billions of dollars," lamented a foreign exchange executive at a shipbuilding company. Had they effected a swap transaction, diverting the dollar into strong currencies like the euro or yen, he regretted, his firm would have been able to minimize the loss.

Individuals also frequently sustain losses under the common misperception that "foreign currency" equals "the dollar." The biggest victims these days are those husbands who have to support their families living overseas for educational purposes. Because of the strength of the dollar against the won, when they remit a sum in dollars they now have to pay nearly 10 percent more in won than before. Had they chosen strong currency deposits like the euro at the outset, they would have avoided the damage.

Since last year China has been shifting part of its foreign reserves invested in American bonds to the euro and other currencies. It's a state strategy aimed at freeing itself from a one-sided reliance on the dollar. We also need a superior currency management strategy utilizing a diversified stable of currencies like the euro and yen and other strong currencies that appreciate if you hold them. We need to keep in mind foreign exchange experts' advice that exchange rates are not in the realm of God, but in the realm of corporations and individuals, and they can be managed.

This column was contributed by Lee Kwang-hoe from the Chosun Ilbo's Business News Desk.

Thinking the Unthinkable. China and the US Dollar.

“The US dollar is no longer a stable anchor in the global financial system, nor is it likely to become one, therefore it is time to look for alternatives.”-Fan Gang, People’s Bank of China’s policy committee.

China threatens 'nuclear option' of dollar sales
By Ambrose Evans-Pritchard Telegraph
Last Updated: 6:00pm BST 07/08/2007

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US.

"Of course, China doesn't want any undesirable phenomenon in the global financial order," he added.

He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.

"China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.

"China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," he told China Daily.

The threats play into the presidential electoral campaign of Hillary Clinton, who has called for restrictive legislation to prevent America being "held hostage to economic decicions being made in Beijing, Shanghai, or Tokyo".

She said foreign control over 44pc of the US national debt had left America acutely vulnerable.

Simon Derrick, a currency strategist at the Bank of New York Mellon, said the comments were a message to the US Senate as Capitol Hill prepares legislation for the Autumn session.

"The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles," he said.

A bill drafted by a group of US senators, and backed by the Senate Finance Committee, calls for trade tariffs against Chinese goods as retaliation for alleged currency manipulation.

The yuan has appreciated 9pc against the dollar over the last two years under a crawling peg but it has failed to halt the rise of China's trade surplus, which reached $26.9bn in June.

Henry Paulson, the US Tresury Secretary, said any such sanctions would undermine American authority and "could trigger a global cycle of protectionist legislation".

Mr Paulson is a China expert from his days as head of Goldman Sachs. He has opted for a softer form of diplomacy, but appeared to win few concession from Beijing on a unscheduled trip to China last week aimed at calming the waters.