THE DOLLAR dropped to a fresh 14-month low against the euro yesterday after the People’s Bank of China suggested that, while the dollar should remain dominant, the share of the euro and the yen should increase in its foreign exchange reserves.

The exact composition of China’s $2,270 billion foreign exchange stockpile, the world’s largest, is a state secret, but it is estimated that it is held 60 per cent in dollars, 30 per cent in euro, and the remainder in sterling and yen.

Fears that China would diversify its reserves away from a weakening dollar have been a drag on the US currency in recent months, amid repeated concerns from Chinese authorities over the value of its stockpiles.

The dollar fell to a low of $1.5061 against the euro, its weakest level since August 2008, on the news. But the US currency pared its losses against the single currency after the author of the report, which appeared in the Financial News, said it was purely a “personal view”.

The dollar also received support later in the day as US stock markets weakened.

Financial stocks moved sharply lower as investors digested reports that the US government was planning to make it easier to seize control of failing financial institutions.

Analysts said this fuelled demand for the dollar from investors looking for a safe haven.

Oil prices fell by more than $2 a barrel to less than $79 a barrel yesterday as commodity markets moved lower in response to stock market weakness and the rebound in the dollar.

However, despite the dollar’s comeback from its 14-month low, one US commentator suggested its plummet earlier in the day was an early indicator of a more permanent slide. The currency will become worthless when people eventually realise that the fiscal situation in the US is a “disaster”, said Marc Faber, publisher of the Gloom, Boom Doom report.

“It will go to a value of zero eventually, but not right away,” he said.

“I think it will take about 10 years until people realise that the fiscal situation of the US is a complete disaster.”

The dollar’s rally will not last because the US will be forced to print more money to pay its debt, Mr Faber added. – (Copyright The Financial Times Limited 2009/ Bloomberg)