BLBG: China’s Central Bank Sees Limited Rebound for Dollar (Update1)
By Bloomberg News
April 2 (Bloomberg) -- The People’s Bank of China said the U.S. dollar will have only a limited rebound in 2010 because of the nation’s high fiscal deficit and low interest rates.
The greenback may see a “technical rebound” from last year’s declines, though the appreciation may not be “too big,” the central bank said in its 2009 international financial markets report posted on its Web site today. The U.S. currency may also be sought less as a haven due to the global economic recovery, according to the statement.
China, the biggest foreign owner of U.S. Treasuries, cut its holdings by $5.8 billion to $889 billion in January, the third consecutive monthly reduction. The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, has risen 3.9 percent this year, after losing 4.2 percent last year.
“Even if the dollar rebounds, its strength will be limited,” the statement said. “The Federal Reserve may keep the interest rate at a super-low level for a relatively long period of time and the fiscal deficit is at a historically high level. Rebounding consumption may expand the current account deficit and the global economic recovery may ease risk aversion.”
Premier Wen Jiabao said on March 14 dollar volatility is a “big” concern and he is worried about China’s assets denominated in the dollar. China has $2.4 trillion in currency reserves, the world’s largest holding.
Budget Deficit
The U.S. budget deficit reached a record $1.4 trillion for the fiscal year that ended Sept. 30 amid falling tax revenue from the recession, a bailout of the banking and auto industries, and the $787 billion economic stimulus package. President Barack Obama’s administration expects the shortfall to widen to $1.5 trillion this year.
The central bank statement also said new asset bubbles are emerging in some parts of the world and some sectors and these may burst unless “supported by economic fundamentals.” The rapid increase in asset prices has been pushed up mainly by excessively loose monetary policies pursued by governments around the world, it said.
