Thursday, December 09, 2004

The title of Martin Wolf's opinion piece in yesterday's Financial Times was "The world has a dangerous hunger for American assets". The big surge in the dollar yesterday and continuting on today couldn't be more apropos -- especially since that hunger is gnawing away at only a handful of big eaters in the global political economy.

While the financial press was speculating that private investors were booking dollar profits or simply getting frightened by the "too far, too fast" fall in the dollar, Asian central banks were again working their magic at the 5-yr. Treasury note auction.
US dollar sentiment was also aided by the revelation that Wednesday�s $15bn 5-year Treasury note auction drew a record high 65 per cent participation by indirect bidders, usually a proxy for foreign central banks, easing concerns that central banks were looking to cut dollar exposure.

�This is not only higher than the 44 per cent seen in last month�s 5-year auction, but the highest foreign participation since the data have been made available in summer 2003,� said Ashraf Laidi, chief currency analyst at MG Financial.
Bloomberg adds some texture:
In the five-year note sale, the ratio of bids to securities sold fell to 2.6 from 2.9 at the prior sale. Indirect bidders, a category that includes foreign central banks, bought 65.8 percent of the sale, the largest since Treasury began reporting the figure in May 2003.
So not only were central banks buying up two-thirds of the bonds, but private investors were not even bidding as much as at the last auction much less buying.

With Japan peering over the edge into recession and squeezed by continuing deflation, combined with the structural demands that the US consumer market grow faster than everyone else, the likelihood that central banks will stop funding US profligacy is next to zero.

The balance of financial terror teeters on.

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