Related to the Business Week article sent to the list last Friday by Jim
D. on the danger of the US deficit on the current account and increasing
foreign debt, below is an article in last Saturday's Financial Times,
which concludes that the "day of reckoning" for the dollar "is close at
hand".
The article emphasizes that the key problem is that it is not necessary
for foreign investors to sell US assets for the dollar to fall. All that
is necessary is that foreign investors cease to buy US assets, or buy them
at a slower rate. And it argues that there are good reasons to believe
that foreign investors may indeed purchase US assets at a slower rate in
the coming months: US asset markets are no longer outpacing the rest of
the world; the price-earnings ratio on US stocks is almost twice as high
as on European stocks (the print version of the article has an impressive
graph of this differential in price-earnings ratios, which has increased
in recent months); and US bonds have become less attractive. One could
add that the Enron scandal and the more general accounting crisis in the
US have led many to have doubts about the value of US assets.
If the day of reckoning is at hand for the dollar, then so it is for the
US economy, which has become increasing dependent on foreign capital in
recent years, and which would suffer negative consequences if this inflow
of foreign capital were to slow down (rising interest rates, slower
investment and growth, higher unemployment, etc.), and especially if it
were to turn into capital outflows.
Fred
Analysts sense day of reckoning for dollar: A fall in capital inflows to
the US has alarm bells ringing
Financial Times; Apr 27, 2002
By CHRISTOPHER SWANN
After a frustrating couple of years, dollar bears in the foreign exchange
market are scenting blood.
With the US economy supposedly leading the world out of recession, one
might have expected the greenback to spring higher. In fact it has fallen
by almost 3 per cent over the past month in trade-weighted terms.
Currency strategists are asking whether this sign of vulnerability
presages the long-awaited fall in the dollar or whether it is yet another
false alarm.
Defenders of the dollar are quick to point out that the recent weakness of
the currency is largely the result of bets by speculative
traders. Speculators have taken these positions several times over the
past few years, only to be forced to withdraw their bets because fund
managers continued to invest heavily in US assets.
This argument would suggest that the recent weakness of the dollar could
be relatively short-lived. But a rising number of analysts are unpersuaded
by this sanguine analysis. "This is not just a fire drill for the dollar,
it is a real alarm," says David Bloom, currency strategist at HSBC in
London.
The key problem for the US currency is that investors do not need to sell
US assets for the dollar to fall. All that is necessary is that they fail
to buy.
The bloated US current account deficit, running at about 4 per cent of
gross domestic product, means that the US needs to attract a net inflow of
around Dollars 1.5bn (Pounds 1.04bn) every day in order to stop the dollar
falling.
The latest figures from the US Treasury provide strong indications that
capital inflows are finally drying up. In January the net inflow into US
equities and fixed income was just Dollars 9.5bn. This is weak even
compared with the Dollars 17.8bn the US attracted in September.
Analysts say the US is struggling to attract funds because its asset
markets are no longer outpacing the rest of the world.
"Over the past few years, just when one source of inflows for the dollar
ran dry another would take over," said Ray Attrill, director of research
at 4Cast, the economic consultancy. "Now it is becoming harder to see how
the US can attract enough funds to prevent the dollar from
falling." Inflows into US corporate bonds, which funded the lion's share
of the current account last year after mergers and acquisitions inflows
dried up, are thought unlikely to be as important in 2002. Economists are
concerned that recovery has been based on companies rebuilding their
stocks after the slowdown and government spending rather than on a pick-up
in investment spending.
"This is low-quality economic growth of the kind that does not boost
corporate profits," said Paul Meggyesi, senior economist at Deutsche
Bank. "It is looking increasingly like the day of reckoning for the dollar
is close at hand."
Copyright: The Financial Times Limited 1995-2002
