Monday, October 18, 2004

The US dollar fell today as the private capital flows supporting the sinkhole under the dollar drained out markedly in August.
The dollar slid to a new seven month low against the euro after data showed foreign appetite for US assets shrank in August to its weakest level this year.

The Treasury reported net foreign inflows into US securities totalled $59bn in August, down from $63.1bn in July, and the lowest monthly total since October last year. . . .

Inflows in the year to date totalled $594bn compared with a trade deficit of $394bn, but strategists warned this masked weakening inflows on a quarterly basis. The first three months of the year saw an average $85bn a month; this eased to $71.6bn in the second quarter, and to date, an average $61.5bn in the third quarter.

�This contrasts with the trade deficit, whose upward pace is outpacing net inflows,� warned Ashraf Laidi, chief currency strategist at MG Financial, who noted too that the ratio of inflows to the trade deficit (outflows) had fallen to 1.1 from 2.2 near the end of last year.

Strategists said the detail of yesterday's data added to market concerns about the dollar's vulnerability. . . .

"The important thing is how the inflows are made up," said David Bloom, currency analyst at HSBC. "Government sector flows were very high - the private sector does not want to fund the current account deficit at this price; it is politically funded."
Indeed. In August, central bank purchases were 38% of all foreign purchases of long-term US securities. For all of 2003 they were just 19%; over the last 12 months, 29%; over the last four months, 22%.

The numbers are downright ugly when it comes to US treasuries. Foreign offical sources and international institutions bought $19.7bn of them in August while foreign private sources sold $5.1bn. The was the worst evaluation of US treasuries by transnational capital since October 2003 when they sold net $7.3bn.

Private capital began fleeing US treasuries in 2000 and 2001. It came back in strength in 2003 and the first half of 2004, but that burst of favor might be fading, demonstrated by the rising percentage of treasuries bought by official sources mentioned two paragraphs up.

Always remember, of course, that one month does not a trend make. That being said, there is real fear again that the dollar might collapse. I don't think there is a genuine possibility that foreign central banks simply stop buying US t-bills, deciding against what some call "Bretton Woods II". Instead the real risk is that private capital starts pushing the dollar down, daring the central banks to rescue it.

This economy could start resembling the Jimmy Carter malaise days in more way than one.


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