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Rising sun, falling dollar
Comments out of Japan are renewing fears about a currency "diversification" drive.
March 10, 2005: 8:43 AM EST

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NEW YORK (CNN/Money) - The U.S. dollar is taking a beating again on comments out of Japan that rekindled traders nervousness about a world that may be getting less enamored with the greenback. The latest twist in the dollar soap opera came from Japan.

Overnight the prime minister, Junichiro Koizumi, said in response to questions from parliament, that diversity in foreign exchange reserves is necessary. Japan's finance ministry quickly clarified the remark, saying it has no plans to dump dollars -- or words to that effect.

You may recall that just last month the South Korean central bank spurred a similar dive in the dollar by issuing a report that also talked about foreign exchange diversification.

Since both of these countries hold lots of dollars, when they talk about diversifying the logical conclusion is that they would pare back dollars. Maybe they would instead beef up their euro holdings.

The important point to note in regard to the Japanese comments last night -- albeit countered by the finance minister -- is that Japan's US security holdings are more than triple that of South Korea's at over $700 billion. This also hit the U.S. bond market where the government is auctioning off 10-year notes today. A big worry for that market has long been that big bond holders like Japan and China would decide at the very least to stop buying as many as they have been in recent years. The mere worry is something that could add to upward pressure on interest rates.

Click here for more HaysWire.

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-- Kathleen Hays is economics correspondent for CNN and contributes to Lou Dobbs Tonight.  Top of page

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