- The Washington Times - Wednesday, November 24, 2004

The dollar fell to new lows yesterday after Russian officials said they may shift more of the nation’s $113 billion arsenal of reserves out of dollars and into euros.

The greenback hit a record low of $1.3176 against the euro and dropped to 102.83 yen, the lowest since 2000, after a top official at Russia’s central bank expressed dismay about the dollar’s plunge. The dollar has lost one-third of its value against the euro since 2001.

“Most of our reserves are in dollars and that’s a cause for concern,” Russian Central Bank First Deputy Chairman Alexei Ulyukayev told reporters in Moscow.

“There’s no fundamental reason for the U.S. currency to strengthen. There are reasons for it to go lower over an extended period,” he said, pointing to the record U.S. trade and budget deficits. The United States must attract nearly $2 billion a day from Russia and other countries to finance those deficits.

“It’s a real problem,” Mr. Ulyukayev said. “Looking at the dynamics of the euro-dollar rate, we are discussing the possibility” of changing the makeup of reserves. Russia currently holds about two-thirds of its reserves in dollars and one-third in euros.

Analysts say Russia’s move could signal an ominous trend for the United States. One of the principal sources of strength for the dollar historically has been its status as the world’s leading reserve currency.

Central banks and people around the world have been willing to hold trillions of dollars, rather than exchange them for their own currencies, because the dollars traditionally have kept their value. But that is rapidly changing.

In the past year, the slump of the dollar has prompted private foreign citizens to unload dollar holdings and avoid new U.S. investments, forcing central banks to step in and play a critical role in propping up the dollar and financing the U.S. deficits.

The boycott by foreign buyers has been a factor holding back the U.S. stock market this year. Now, even the central banks, which invest their dollars mostly in bonds, may be starting to balk.

“Central banks are becoming more like professional fund managers — they want to maximize returns,” said Steven Saywell, a currency strategist at Citigroup Inc. “If you are of the view that the dollar is going to depreciate significantly, then it makes sense for central banks to reduce any aggressive overweightings in dollars.”

Central banks worldwide hold about 64 percent of their reserves in dollars, according to the International Monetary Fund. Since the dollar started its descent three years ago, the share of holdings in euros has crept up to about 20 percent from 16.7 percent.

Many analysts believe China and Japan — which together hold nearly half of the U.S. national debt because of their furious pace of dollar purchases in recent years — soon may decide, like Russia, to diversify out of dollars.

In China, which links its currency to the dollar, the dollar’s slump has been stoking the threat of inflation and runaway growth. China also is under tremendous pressure from the United States and other countries to break the link with the dollar for competitive reasons.

Japan for years has been the world’s biggest buyer of dollars and U.S. bonds, but it, too, is under pressure to stop intervening and let the dollar fall against the yen.

Japan has refrained from intervening amid signs that the Bush administration is willing to let the dollar continue its rapid fall.

“The dollar is friendless and in danger of free fall,” said Neil Mackinnon, chief economist at ECU Group.

Under the administration’s policy of benign neglect, he said, even renewed intervention efforts by the Bank of Japan and European Central Bank will fail to stem the dollar’s decline because traders would see them as futile.

In recent weeks, evidence of stronger economic growth in the United States has not provided support for the dollar as it normally does. Yesterday, reports of declining jobless claims and a buoyant U.S. housing market, for example, had little effect on the exchange rate.

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