Japan and China lead flight
from the dollar By Ambrose
Evans-Pritchard, International Business Editor
Last Updated: 12:26am BST 10/18/2007
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.
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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.
The US requires $70bn a month in capital
inflows to cover its current account deficit
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
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
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.
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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,"
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,"
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
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.