Monday, November 12, 2007

Currency Speculation

It is said that Chinese have more than a trilion US dollars in its foreign currency reserve. With the recent depreciation of the dollar, the Chinese reserve just goes down together with the dollar. Although there are calls for the Chinese central bank to reduce its US dollar holding, many analysts speculate that China won't do that, as that will make China's reserve go down significantly in value, wiping out all the paper wealth it had accumulated over the years, with hard-earned money.

Why do the analysts think so? Who says if China reduces her US dollar positions, it will be a shot on her own foot? Do you still remember what George Soros did during the 1997/98 Asian financial crisis? They just sold down on a country's currency on the one hand, on the other hand, they bought futures on the devaluation of those currencies. You can't do it to a single stock counter, but you can do it to a country! Dumping a trilion dollars into the market will sure send the dollar down to hell, while the Chinese can still make some handsome profit.

Well, but there is a slight catch here. US dollar is still THE reserve currency. The Americans enjoy a special previllege as the legal owner of that reserve currency. They can just keep printing. No gold standard anyway, it is just good old faith.

Nah, whatever it is, it seems to me the current events have more and more similarities to what happened 10 years ago. Everything that has a beginning, has an end. While an end, is always the beginning of the next ending :)

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