[Marxism] Japan and China lead flight from dollar

Greg McDonald sabocat59 at mac.com
Thu Oct 18 07:57:16 MDT 2007


  Japan and China lead flight from the dollar

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 12:26am BST 18/10/2007

Japan and China led a record withdrawl 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.

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.

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.

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