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Sunday, January 30, 2005

Malaysia First Country to Dump US Dollars

A recent report by Bank Negra Malaysia, the nation's central bank, states that Malaysia made $2.1 billion "revaluation gain" in 2004, "arising mainly from the depreciation of US dollar against major currencies."

While central banks don't generally release the details of their holdings, it has led to speculation that Malaysia is buying an increasing amount of euros and/or yen these days. "Its central bank sure didn't make that kind of cash holding the dollar," says William Pesek, writing in Bloomberg news, noting that Malaysia's own currency, the ringgit, is currently pegged to the dollar.

According to Pesek:
The plot thickens when you consider how such a shift away from the dollar would jibe not only with comments from top Malaysian officials, but trends throughout Asia.

Here in Malaysia, for example, Prime Minister Abdullah Ahmad Badawi recently said he is seeking ways to reduce the economy's reliance on the dollar for trade. Indonesia has mentioned it is considering trimming its holdings of U.S. Treasuries. The same goes for Thailand, according to the Financial Times.
There is no doubt that the Chinese are watching this with great interest as they consider un-pegging the Yuan from the dollar. Pesek notes the irony that the US has been using its economic might to bully China into revaluing the yuan: "Yet it seems it is US weakness -- a fragile dollar -- that may be the catalyst:"
The U.S. finds itself in a be-careful-what-you-wish-for situation here. If China tomorrow announced it was letting the yuan float, as the U.S. wants, its central bank wouldn't need anything near the $191 billion of U.S. debt it holds. Massive dollar selling could follow.
Coming on the heels off comments by Chinese economist Fan Gan last week (which can be found in the excellent diary by LondonYank) it only goes to support the thesis that we are lurching toward a "tipping point" where nobody wants to be the last one out of the US currency business.

And it may happen sooner rather than later:
It means now is as good a time as any for this region to avoid losses ahead of any surge in U.S. debt yields. After all, in real estate, it is all about location, location, location. With markets, it's timing, timing, timing, and waiting means Asian central banks may lose even more.

Confidence in the dollar wasn't enhanced this week by President George W. Bush's record budget deficit forecast of $427 billion for this fiscal year. It belied assurances that the White House will bring one of the world's most worrisome economic imbalances under control.

All this has investors turning to the euro. Once Asian central banks do, the dollar's woes will worsen. By buying vast amounts of Treasuries, Asian central banks are delaying the rise in U.S. yields that would typically accompany a falling currency. If Asians pull the plug, U.S. rates could skyrocket.

Should be an interesting to watch in the near future as dollar tensions aproach critical mass. But what do I know -- as my friend Peter reminds me, "you thought Kerry was going to win."