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Currency: Diversity wins?

The rumblings about what various countries will do with their currency reserves are continuing.

China’s capital inflows seem to be picking up again, so the topic will remain in the spotlight and suggests that the USD is likely to remain under pressure, unsupported by higher yields or tentative signs that its economy will be one of the first to come out of recession.

Bank of New York Mellon reports China’s vice-finance minister Li Yong saying that the government would like to see a more diversified international currency, based not only the USD but also on the EUR, GBP and major Asian currencies. Elsewhere, Brazil has confirmed that it plans to buy $10 billion of bonds issued by the IMF and linked to special drawing rights.

However, Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubishi UFJ, believes the talk of diversification may be overstated. “The surge in 10-year yields Wednesday – from 3.85% to 3.95% – has once again raised fears over a potential crisis of confidence in the US sovereign debt market, which has also raised fears over a potential collapse of the dollar,” he says. “The concern over the scale of supply coming to the US debt market has been exacerbated by the moves of some major central banks to diversify out of US fixed-income investments and into IMF bonds denominated in SDRs.

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