MercoPress. South Atlantic News Agency

Chinese “weak currency” curse sends US dollar tumbling

A Chinese official sent the US dollar plunging in markets when he said China would shift more of its huge international reserves into “stronger currencies” such as the Euro to offset “weak” currencies like the dollar.

Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress statements quoted by wire services, made the US dollar drop across the board against major currencies and hitting a new low of 1.4730 against the Euro. The statements were particularly significant because this Thursday the European Central Bank and the Bank of England will be deciding on interest rates. Most analysts said that Cheng, who is notorious for his off-the-cuff, market-moving remarks, was probably not expressing official policy since a rapidly plunging dollar isn't in China's best interest, because it erodes the return on the country's massive holdings of dollar-denominated assets. However, a more gradually dropping dollar is in China's interest -- at least for the short-term. Euro strength means European exports are more expensive and therefore less desirable in overseas markets, whereas Yuan weakness gives Chinese imports a competitive edge in European markets. Some analysts took Cheng's comments as tacit admission that China has welcomed the dollar's recent downtrend against Europe's united currency. China's exports to the E.U. have grown by 37% this year, outpacing 17% growth for U.S.-bound exports. Cheng said Wednesday that a rapid appreciation of the Yuan is not necessarily the right move, though he insisted the country wasn't actively seeking a major trade surplus. But the trend has not escaped the notice of European policymakers, who zeroed in on China and its currency at their meeting last month. Jean-Claude Juncker, chairman of the Eurogroup of finance ministers, European Economic Affairs Commissioner Joaquin Almunia and European Central Bank President Jean-Claude Trichet plan to make an official visit to Beijing before the end of the year, and analysts expect the Yuan to be at the top of their agenda. China awash in liquidity and facing mounting inflationary pressure, can't afford to let the Yuan drop against the Euro forever. Allowing its currency to appreciate would have the same net effect as a monetary tightening, and would therefore help prevent the economy from overheating. However China, whose holdings of U.S. Treasury bonds are second only to those of Japan, is already diversifying out of that asset. The latest data show its Treasury holdings were down 5% at a six-month low of 400 billion.