China Reaffirms the Dollar Standard

Last updated 6/29/2009 4:21 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

PBOC governor Zhou Xiaochuan told reporters in Basel on Sunday that China’s “foreign exchange reserve policy is always quite stable,” and noted that China’s reserve policy is aimed at “liquidity, safety and returns.” The news helped to boost the dollar at the start of trade this week, with EUR/USD falling through the 1.4000 level as traders breathed a sigh of relief regarding the greenback’s ongoing status as a reserve currency.

On Friday the buck came under pressure after China hinted at a need for new architecture in the foreign exchange market. The PBOC stated that, "To prevent the deficiencies in the main reserve currency, there’s a need to create a new currency that’s delinked from the economies of the issuers."  However, today tacit reaffirmation of the dollar standard is a sign of Chinese acknowledgement that for the time being the   greenback remains the primary manner for settling global trade accounts.

Furthermore, as we noted earlier, it is very much in China’s interest to maintain the value of the dollar, both from the balance sheet perceptive (because its holds nearly 2 trillion dollars of US debt), but also because the country runs a massive trade surplus with the US and any additional weakening of the dollar would dampen American demand for Chinese goods. The dollar remained well bid  in the aftermath of those comments and could gather further momentum as the day progresses if EZ data retail PMI proves disappointing.    

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.