Markets are clever enough not to over- react, he says
(SEOUL) Alan Greenspan doesn’t expect a rapid decline in the dollar should China sell more of its holdings of US Treasuries, according to people attending a forum here yesterday.
‘When asked whether there will be a plunge in the dollar in case China offloads its US Treasury holdings, Mr Greenspan said it’s already-known information that won’t trigger any rapid drop in the US dollar,’ according to Kong Dong Rak, an analyst with Hana Daetoo Securities. ‘His view is that markets are clever enough not to overreact.’
The former Federal Reserve chairman was speaking via satellite from Washington and media were excluded from his presentation. The conference was hosted by Maeil Business Newspaper.
Japan, China and Taiwan sold US Treasuries at the fastest pace in at least five years in August as losses linked to US sub-prime mortgages sparked a slump in the dollar.
Japan cut its holdings by 4 per cent in August to US$586 billion, Treasury Department figures showed. China’s holdings fell by 2.2 per cent to US$400 billion and Taiwan’s slid 8.9 per cent to US$52 billion.
Kim Gyung Rok of Mirae Asset Investment Management, confirmed Mr Greenspan’s remarks on the dollar.
‘Foreign exchange markets have already priced in bit by bit’ the possibility of an unloading of US Treasuries, he said.
Mr Greenspan is ‘of the opinion that holdings of foreign exchange reserves tend not to be moved easily’, Mr Kim said.
The dollar has fallen 7.5 per cent against the euro this year after the Fed cut interest rates last month to support the housing market, reducing the yield advantage of US fixed-income assets.
The US currency slumped to a record low against the euro on speculation that the growth outlook in the US will push the Fed to make another reduction at the end of the month.
The dollar declined 0.6 per cent to US$1.4294 per euro, after earlier reaching an all-time low of US$1.4305 in early New York trading. It fell one per cent to 115.46 yen. It earlier reached 115.29, the lowest since Oct 2.
The New York Board of Trade’s dollar index touched 77.5, the weakest since the index began in 1973.
Eisuke Sakakibara, Japan’s former top currency official, said that the US currency may ‘plunge’ in 2008 should US economic growth ‘fall below one per cent’. He spoke in an interview yesterday in Tokyo.
On Wednesday, the International Monetary Fund cut its forecast for US growth next year to 1.9 per cent. IMF officials said the dollar is overvalued compared with its medium-term fundamentals. According to the Financial Times, Simon Johnson, chief economist of the Fund, said the weakening dollar was part of a normal process of economic rebalancing and was positive for the global economy provided that other currencies also adjust.
However, Mr Greenspan said the slowdown is unlikely to lead to a US recession, though it will still have a negative effect on Asia’s economies, according to Maeng Young Jae of Samsung Securities. ‘Greenspan seems more optimistic about the US economy than pessimistic.’
Mr Greenspan said China’s policy on the yuan ‘could cause long-term instability in the Chinese economy’, according to Ben Arber, head of global payments and cash management at HSBC Holdings in Seoul.
Source: Bloomberg (Business Times 19 Oct 07)