By plowing more than two thirds of its mammoth foreign currency reserves into US dollar denominated assets, China has gained significant political leverage.

They continue to hold very large positions in dollar denominated assets, which they would not do if they thought the US faced a choice between a cheap dollar and a deep depression.

As a result, holders of dollar denominated assets should be looking forward to two alternative scenarios.

In neither scenario does it make sense to hold huge amounts of dollar denominated assets today.

And that raises serious questions about the wisdom of China s massive investments in dollar denominated assets.

The actual budget increase cannot be determined simply by noting a change in the dollar denominated amount.

Therefore, foreign speculators should, any day now, dump their dollar denominated assets onto the market, and so bring about the dollar decline that they so fear.

As a result, China s dollar denominated foreign exchange reserves, which account for the largest share of all the foreign holdings of US government securities, will suffer interest rate losses.

China has recycled about 60 of these reserves back into dollar denominated US government securities, because it wants to limit any appreciation of the renminbi against the world s benchmark currency.

Second, China s foreign assets are denominated almost exclusively in US dollars, while its foreign liabilities are denominated mostly in renminbi.

Second, the costs of the insurance premium the outsize, largely dollar denominated reservoir of China s foreign exchange reserves have been magnified by political risk. With US government debt repayment now in play, the very concept of dollar based riskless assets is in doubt.

One might think that foreign investors would quake in terror at these terms and shy away from dollar denominated assets.

If rich country central banks can buy long term bonds, then emerging country central banks can buy dollar denominated bonds.

In November 2001, the authorities again restructured the public debt, this time exchanging dollar denominated bonds for domestic guaranteed loans.

That will sharply reduce the pace of foreign exchange accumulation and cut into China s open ended demand for dollar denominated assets.

With everyone else buying, selling, and holding dollars, it pays to do the same, since markets in dollar denominated assets will be the deepest.

In 1994, Mexico shook the global economy when the extent of its domestic (but dollar denominated) debt in the so called tessobonos became apparent.

Second, the costs of the insurance premium the outsize, largely dollar denominated reservoir of China s foreign exchange reserves have been magnified by political risk.

Japan, China, and other export oriented East Asian economies are indeed eager to keep the value of the dollar relatively high, and their central banks have piled up close to 2 trillion in dollar denominated assets.

At the same time, periphery countries held a lot of dollar denominated obligations which they had to repay when they could not roll them over.

All of this spells lasting damage to the credibility of Washington s commitment to the full faith and credit of the US government. And that raises serious questions about the wisdom of China s massive investments in dollar denominated assets.

Yet the typical investor in dollar denominated assets whether a rich private individual, a pension fund, or a central bank has not taken the steps to protect themselves against the very likely dollar decline in our future.

Supported by a dollar denominated line of credit, the EPU s 15 Western European member states established exact dollar exchange rate parities as a prelude to anchoring their domestic price levels and removing all currency restrictions on intra European trade.

Annex I, table 1 US dollar statements

While China has taken minor measures to slow the increase in its dollar denominated holdings, it has been unwilling to risk a fully convertible currency for domestic political reasons.

China's government regards the threat of capital losses on its dollar denominated securities as less important than the need to maintain near full employment in coastal manufacturing cities like Shanghai.

With rebalancing will come a decline in China s surplus saving, much slower accumulation of foreign exchange reserves, and a concomitant reduction in its seemingly voracious demand for dollar denominated assets.

The principal risk I see today is that being borne by investors in dollar denominated debt and I don t believe they are charging a fair price for what they are doing.

Once portfolio investors start selling their dollar denominated securities, a stampede will follow, causing the dollar's value to crash and triggering the first major global financial crisis of the twenty first century.

If the dollar is likely to fall against the euro over the next several years, investments in euro denominated bonds issued by the German or French governments may provide higher safe returns.

European and other international banks had acquired a lot of dollar denominated assets which they habitually funded in the interbank market as the market dried up, they were forced to buy dollars.

The weaker dollar reduces the US standard of living.

Many developing countries have made progress since the 1990 s in shifting from dollar denominated debt toward foreign direct investment and other types of capital inflows, or in paying down their liabilities altogether.

Moreover, the Lebanese pound is pegged to the US dollar.

The dollar is declining because only a more competitive dollar can shrink the US trade deficit to a sustainable level.

China recognizes that it no longer makes sense to stay with its current growth strategy one that relies heavily on a combination of exports and a massive buffer of dollar denominated foreign exchange reserves.

For now, the US dollar remains the most important international currency.

Indeed, even when problems originate in the US, the dollar strengthens.

Fewer foreign purchases of US assets again imply a weaker dollar.

The exchange rate was approximately Rp 9.000, to One US Dollar.

Payment of expenditures relating to common staff costs is effected in Euros It should further be noted that approximately 90 per cent of the expenditures of the secretariat are denominated in Euros Thus, the currency exchange fluctuations between the Euro and US United States dollar (US ) since 2003 have continued to adversely erode the purchasing power of the secretariat budget.

Back in the 1970 s, there was some limited issuance of SDR denominated liabilities by commercial banks and SDR denominated bonds by corporations.

One answer, of course, is a complete collapse of the US dollar.

Unless the US economy improves its trade balance, the dollar will fall.

But the US cannot improve its trade balance unless the dollar falls.