From: "John Beamish" 

http://www.theglobeandmail.com/servlet/story/LAC.20061128.RDOLLAR28/TPStory/Bus
iness

Struggling U.S. dollar triggers currency concerns Long-term threat of
'trade chaos' cited

BARRIE MCKENNA

WASHINGTON -- Renewed fears that the Chinese central bank may be poised to
start liquidating its $1-trillion stash of U.S. dollars briefly drove the
greenback to a 20-month low against the euro and a two-year low against the
British pound in trading yesterday.

The euro surged to $1.3172 (U.S.) against the greenback and the pound to
$1.9469, before losing ground by day's end. The loonie and the yen have
also gained on the U.S. dollar in recent days.

The sudden weakness of the U.S. dollar began late last week, soon after
Chinese officials suggested that holding a lot of dollars might be a losing
investment strategy. Investors read that as a signal that the massive trade
and financial imbalances between Asia and the U.S. may be about to unwind.

The chief worry is that if China's central bank -- the largest foreign
holder of U.S. dollars -- begins to unload its reserves, the dollar will
plunge. With China's yuan effectively pegged to the dollar, other leading
currencies would move higher after the realignment.

There's no evidence yet that's what China is actually doing. But few
investors want to be the ones left holding dollars when the plunge comes.
"People are getting very nervous," said Andrew Busch, chief
foreign exchange strategist at BMO Nesbitt Burns in Chicago.

"It's a wonderful behavioural science experiment and it's being played
out with billions of dollars. The first to get out tips the scales."

Central banks in Russia and in some Middle Eastern countries have already
announced plans to cut their U.S. dollar holdings.

China's currency rose to a new high against the greenback yesterday as the
Chinese central bank set its official exchange rate at 7.8402 yuan to the
U.S. dollar. That's the highest level since July of last year when China
relaxed its tight currency controls. Since then, however, the yuan is up
just 3.3 per cent versus the dollar.

By contrast, the greenback is down 10 per cent against the euro and roughly
2 per cent against the yen and the Canadian dollar so far this year. The
loonie closed at 88.32 U.S. cents, up from 88.05 Friday, while the U.S.
dollar rose to 116.13 Japanese yen from 115.55 yen.

Also pushing the movement in currencies is the slowing U.S. economy, which
could force the U.S. Federal Reserve Board to cut interest rates in the
coming months. Meanwhile, the European Central Bank is looking at a
possible interest rate increase next month.

The net effect is to make euros more attractive. It has also begun to
encourage Europeans to buy more imported goods, and even take trips to the
United States.

The British pound is rising alongside the euro, spurring a resurgence of
holiday shopping junkets to New York by British tourists, according to Dee
Byrne, spokeswoman for the Association of British Travel Agents.

"There has been an upturn in bookings to the States, for Christmas
shopping in particular," Ms. Byrne told Reuters News Agency.
"People are going to New York to do their Christmas shopping, where
they will get much more for their money: It couldn't have come at a better
time."

But other experts see a much more ominous impact of these potentially
seismic currency shifts.

The surging euro could cause permanent damage to the European economy, and
even spur calls for exchange rate controls.

Peter Morici, a former chief economist at the U.S. International Trade
Commission, said China is to blame for unleashing a potentially
destabilizing period of currency realignment by stubbornly refusing to let
its currency float to absorb its soaring trade surplus with the rest of the
world.

"The long-term consequences of this could be trade chaos," warned
Mr. Morici, now a business professor at the University of Maryland.

Talk of exchange rate controls in Europe is an ominous reminder of the
1930s, when protectionism and currency controls helped trigger a global
recession.

"It's like water. There are too many dollars out there, looking for a
place to go," Mr. Morici said. "China is pushing on a wall of
competitive devaluation."

Investors are betting the most likely place for all those dollars to go is
the euro -- often touted as a reserve currency for the world. "The
Europeans wanted a reserve currency and now they're about to find out what
it's like," Mr. Morici said.

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