US dollar drops sharply after banks sell dollar reserves

| August 3, 2005
US dollar drops sharply after banks sell dollar reserves

The US dollar dropped sharply again on Wednesday, as hedge funds, real money investors, and central banks were all selling dollars, mostly to purchase euros.

The Indian, Russian, South Korean, and South African central banks were all said to be selling dollars in pursuit of diversification, but Russia and India were also believed to think that the dollar’s decline is not yet over.

Most notably, the Saudi Arabian Monetary Authority was believed to have purchased between €1.5 billion and €5 billion in euros on Tuesday.

Coming so close to the death of King Fahd, rumors were circulating that the selling was at least partly political in nature, perhaps as part of a plan to shift the Saudi riyal from a peg to the dollar to a peg to a basket of currencies.

Another theory on the move of so many from the dollar to the euro was that after the withdrawal of CNOOC’s bid for Unocal, the Chinese might focus more of their direct investment efforts on the eurozone, where the potential for political complications appeared to be lower.

The US dollar lost 1.2 percent to $1.2341 in relation to the euro, was down 1.3 percent to SFr1.2606 against the Swiss franc, declined by 0.5 percent to $1.7792 in relation to sterling, and fell 0.3 percent to ¥111.06 against the yen.

The drops against the euro, the Swiss franc, and sterling were 2-month, 6-week, and 1-month lows, respectively.

Meanwhile, the euro gained on purchases by foreign banks as well as on a rise in eurozone retail sales of 0.9 percent in the first half of the year. The euro gained 0.9 percent to ¥137.01 in relation to the yen and rose 0.7 percent to £0.6931 against sterling.

Sterling was also lower by 0.7 percent to SFr2.2448 in relation to the Swiss franc, and it lost 0.4 percent against the Australian dollar, to A$2.3045.

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