Posted on 10/16/2007 8:48:34 PM PDT by DeaconBenjamin
Japan and China led a record withdrawal of foreign funds from the United States in August, heightening fears of a fresh slide in the dollar and a spike in US bond yields.
The US requires $70bn a month in capital inflows to cover its current account deficit
Data from the US Treasury showed outflows of $163bn (£80bn) from all forms of US investments. "These numbers are absolutely stunning," said Marc Ostwald, an economist at Insinger de Beaufort.
Asian investors dumped $52bn worth of US Treasury bonds alone, led by Japan ($23bn), China ($14.2bn) and Taiwan ($5bn). It is the first time since 1998 that foreigners have, on balance, sold Treasuries.
Mr Ostwald warned that US bond yields could start to rise again unless the outflows reverse quickly. "Woe betide US Treasuries if inflation does not remain benign," he said.
The release comes a day after the IMF warned that the dollar was still overvalued and likely to face "some depreciation in the medium term".
The dollar's short-lived rally over recent days stopped abruptly on the data, increasing pressure on US Treasury Secretary Hank Paulson to shore up Washington's "strong dollar" rhetoric at the G7 summit this week. advertisement
The Greenback has already fallen below parity against the Canadian Loonie for the first time since 1976 and has touched record lows against a global basket. It closed at $2.032 against the pound.
David Woo, an analyst at Barclays Capital, said Washington was happy to see the dollar slide. "They don't care so long as the fall is not disorderly. They see it as a way of correcting the deficit. " he said.
Mr Woo said a chunk of the August outflows may have come from foreigners borrowing in the US during the liquidity crunch to meet needs in euros. "We think it may be a one-off," he said.
The US requires $70bn a month in capital inflows to cover its current account deficit, but the key sources of finance are drying up one by one.
BNP Paribas said America has relied on "hot money" from abroad to cover 25pc to 30pc of the US short-term credit and commercial paper market over the last two years.
This flow is now in danger after the seizure in parts of the market over the summer and after the Federal Reserve's half point rate cut, which has shaved the US yield advantage over other countries.
Ian Stannard, a Paribas currency analyst, said the data was "extremely negative" for the dollar. "It exceeds the worst fears. It is not just foreigners who are selling US assets. Americans are turning their back as well," he said.
Central banks in Singapore, Korea, Taiwan, and Vietnam have all begun to cut purchases of US bonds, or signalled an intent to do so. In effect, they are giving up trying to hold down their currencies because the policy is starting to set off inflation.
The Treasury data would have been even worse if it had not been for $60bn of inflows from hedge funds based in Britain and the Caymans, which needed to cover US positions at the height of the credit crunch.
Maybe the country can just apply for a Visa card at 29 percent interest but zero for six months and transfer our debt over to that.
So what happened in 1998? Did we meet our demise?
Were we as dependent on borrowing from foreign nations? Now we require $70 billion a month from foreign borrowers.
Half a century of unbalanced budgets have to come due sometime...
And it’s a poor showing when a great country can’t keep control of the value of its currency.
(In the old days, when silver backed the dollar, this couldn’t have happened.)
Should be good news for U.S. manufacturing.
Good point. Those sells turned out to be bad, as rates were at a peak then, and prices at lows. The sellers lost, just as they will this time.
A “weak” currency is only bad, if treasuries soar in yields, because that means borrowing is more expensive for the govt. Nothing would suggest that now, as rates are sub 5%.
The real problem has been, that the USD was actually too strong. It made foreign goods very attractive here, and also brought illegal immigrants here in droves.
Unfortunately we have nothing to back our money … thanks to Nixon. The little we have left in Fort Knox is a pittance in the whole scheme of things.
Control the currency? Like China is doing now, or what Mexico and England were notably doing in 1993 and 1994.
Only a foolish country, or very weak one, controls their currency.
Also, as far as the USD goes, in your opinion, what is the
“proper” rate relative to a foreign basket of currencies?
Also, please tell me what negative ramifications you currently see in the dollar being “weak”?
Chicken Little. The US economy is strong. It is the others who are playing the money game. China will get their comeuppance by staying pegged to the dollar. Never bet against the USA unless the Democrats gain control.
lol. What manufacturing?
A fresh slide in the dollar would do great, great things for the Balance of Payments. Euro-weenies would be deserting their cesspool in droves to migrate to the colonies where everything is cheap.
Data from the US Treasury showed outflows of $163bn (£80bn) from all forms of US investments.
Yup. A buck'll get you about 49 pence. Pop over to London, and that £3 pint will be $6 to you.
Gotta keep the glass half full!
What is it with these threads?
If a weaker dollar is GOOD for US manufacturing, WELL THAT CAN'T BE!!! Because? Ferners are buyin up US manufakturin!
Well, now, if things are headed for a trainwreck...then why would ferners wanna buy up doomed manufacturing?
We have net selling of treasuries not seen in TEN YEARS! YIKES! And what doom occured then? None.
BUT BUT! Now we have to service the debt at levels unheard of when we were tied to silver and gold! Which would have to be true because to expand the economy this rapidly it couldn't be tied to that commodity?
What if....what if the world is not going to end next year?
bump for later
>Also, please tell me what negative ramifications you currently see in the dollar being “weak”?
Our nation gets sold for cheap.
Nonesense. We can always sell off some of our land. France may bargain for New Orleans and maybe Russia will want back a piece of Alaska.
Well, good. Then the $8 snooty brew pub beers on 4th st in Austin will cost those blokes £4.
The Breton Woods Accord was just a nudge and a wink anyway. Only foreign central banks could redeem dollars for gold and there was a gentleman's agreement that they wouldn't. France broke that agreement and Nixon tore it up. You've got to love the political soft pedal "he closed the gold window."
The real culprit is Roosevelt who took us off the gold standard, confiscated private gold stocks, and invalidated gold denominated contracts.
Indeed. China is going to get smacked. I’m just waiting for the opportune time to short their market, and with great pleasure I may add.
Wish you would elaborate, but assume that you mean foreigners can buy our property, businesses, etc for less than true value.
That can be the case, encourages foreign purchase of US goods etc, but some actualy think that is a good thing. Also, foreigners have a wonderful history of buying our real property at very inflated values, only to sell off when crisis hits their own country, selling back to us, on the very cheap. Remember Cali and Hawaii r/e in the 80’s?
I was investigating Lake Havasu AZ for a friend, he’s thinking about moving there. Came across a website for a realtor looking for Canadian investors....
The sellers lost, just as they will this time.
*******
Yep. This happened with Arabs in the late 1970’,Japan in the 1980’s, and now it’s China’s turn to get sheered.
They never learn: Don’t ever bet against God’s country.
Yes, when China’s currency manipulation busts, will be like a dam bursting. The dam meant to protect residents from flooding, instead kills not some of the residents down stream, but every last one of them.
Why is this?
When the currency inflates, it will very quickly bankrupt the substantial number of leveraged ops there, and take down the banks with them.
As an Investment Advisor, I find it amazing to see how all the people can be suckered some of the time, and see the current global investing mantra the most insane I’ve seen in modern history. What many don’t reealize is, that the majority of their return, is just the usd weakening effect on foreign stock values. Same goes for gold and oil... but that is another story.
“Also, please tell me what negative ramifications you currently see in the dollar being “weak”?”
Try INFLATION!
Yes sir, the US is good at “balancing” out unfair trade. Frankly, it is one of our shrewdest games.
Foreigners think the boat coming with their goods, and only leaving with an envelope was good for them, bad for us.
Gee, valuable goods, for worthless paper? I’ll make that trade any time.
Its dorrar.
Good read. A lot of foolish bravado on this board related to financials. With the number, and scale, of things coming together anyone who isn’t hedged at this point is nuts.
LBT
......
We don’t have rampant inflation.
We do have inflated prices of oil due to a weak dollar, but not that much else has gone into a scenario where goods and services are rising annually by more than 3%.
A weak currency certainly runs the risk of this, and at the same time spiraling higher interest rates. Fortunately, they have not happened.
One must think though, what the ramifications are of the weak dollar, to our benefit, to understand why the weak dollar never lasts, and not this time either.
Much like global warming, many assume that the current rate is wrong, old rate was right. But that isn’t the case, as the USD was seriously overvalued to our detriment from 1998-2003. In fact during that time, our currency reached an all time high, something I actually wasn’t aware of until just recently.
Hedged? You mean buying futures and options contracts, gold, shorting one market going long?
Or do you mean diversified into cash, r/e, stocks, bonds, and all the sub categories in each?
The latter would be the way I run my biz, but with a twist, I get rid of grossly overvalued “asset allocation” items. In this market, that would be value stocks and international.
>Should be good news for U.S. manufacturing.<
It is good news U.S. manufacturing! European investors and Asian investors are buying them up like never before. Soon there won’t be any U.S. owned manufacturing plants to speak of.
I mean the latter and would add some ETF shorts in for good measure. I think for the average investor here that will suffice until things settle.
LBT
......
Good man. Yup, ETFs, about the only good packaged product that the street has come up with in a good long while. Even those though, noticed that many of the indexes are conveniently reshuffled as the markets change. I’m assuming there is enormous profit in changing the make up of an index, and a little insider info on that, used once, can make you rich.
With no manufacturing jobs, and a very weak currency, we run the risk of not just illegals leaving the US, but soon our most unemployable Americans are likely to flee to Canada or Mexico.
Unfortunately, we’ll have a hard time explaining to the Mexicans at least, why this is ok, and we should not monitor our border better.
Night.
LBT
.....
My place makes appliance and automotive components.
And what backs the Yen and the Yuan and the Euro?
Because US payouts (Social Security, COLAs, government debt, etc.) are tied (at least indirectly) to interest rates.
“Also, please tell me what negative ramifications you currently see in the dollar being “weak”?”
The so-called “weakness” is not the issue.
The issue is the huge amount of debt requiring financing. If foreign investors stop buying, then the Fed will have to raise interest rates to make those securities more attractive. As they raise interest rates, the economy will be negatively affected.
It’s not healthy from an economic standpoint to pay out 17% or more of gov’t revenues to service debt. The Fed has been inflating the currency for a long time now, so I expect that to continue. But it reaches a breaking point after some period of time, because foreign investors won’t see an inflating dollar as a good investment.
The piper has to be paid at some time and the effects seen in the valuation of he dollar are the first indications.
I’m interested to hear your take on this.
To be sure, now is not the time to straddle the American taxpayer with additional internation expenditures such as LOST. If we cannot meet our current obligations from current spending, we have no business borrowing more money from the world to give to the world as a gift.
Things have picked up here as the year has gone on. And I’m trying to find a local supplier for gears - the guy around the block here who makes them says he has had to turn down work and is looking for a larger place and 10 more employees. And we’re in a area that’s been down since the 70s.
Excellent. I’m delighted to hear it.
How is that Nixons’ fault?
I think the majority of perceived inflation might be due to specific resources experiencing price fluctuations towards the high end. Fuel is certainly more expensive than it was say, ten years ago. That expense is passed onto the consumer to offset the loss of profit, but it's not true inflation as I understand it.
Obviously, I skipped that class in economics...
Never thought of that. Thank you.
Ask the Argentine masses (not the elite who were well out of pesos when the $h!+ hit the fan) how well they’re doing since their currency collapsed in 2001?
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