Monday, January 24, 2005

In Thursday's FT, Samuel Brittain digs up some interesting numbers crunched by the big British bank HSBC.
As the HSBC bank has just reminded us, a 10 per cent revaluation of the renminbi would only reduce the Fed's trade-weighted dollar exchange rate by 1 per cent, compared with the 20 per cent fall that has already taken place. Even if all other Asian currencies were to follow suit, the reduction would still only be 3.7 per cent, but with the risk of a speculative upheaval.
Even if renminbi revaluation comes this year, it is virtually unimaginable that it would be by more than 10%. Unless US personal savings picks itself up off the sticky floor, we could be headed for a current account deficit of 7% of GDP in 2005.

The FT tried to scare us all today with their headline: "Central banks shift reserves away from US". But another headline could be "Best Laid Plans of Mice and Men".
70 per cent of central bank reserve managers said they had increased their exposure to the euro over the past two years. . . .

In a further worrying sign for the greenback, 47 per cent of reserve managers surveyed said they expected the growth of official reserves to slow to less than 20 per cent over the next four years. Between the end of 2000 and mid-2004, official reserves had increased by 66 per cent. . . .

More than 90 per cent of central bank reserve managers said that the income from reserve management was "important" or "very important".
We already knew that Russia among some others was increasing their holdings of euros, but Brad Setser estimates some one-third of all reserve accumulation in 2004 went into non-dollar assets. Sounds like a lot. Moreover, even a slowing of global reserve accumulation could spell danger for an ever-growing US CA deficit.

All that being said, take a step back and consider a few things. First, note that part of this survey was conducted during a month in which net foreign central bank purchases of US long-term securities hit $27.9bn.

Second, central bank quests for higher yielding assets has not yet meant moving out of the dollar. Instead central banks have been buying US agency bonds and even equities with all the salutary effects on US mortgage rates and the stock market.

Third, in 2004 the US is set to run a CA deficit of around $650bn, a gargantuan figure indeed yet easily financed in the midst of net long-term securities flows and net FDI of around $750bn.

A run on the dollar in 2005? No way. The Fed is trying to raise interest rates, but foreign capital has such a hunger for US assets that mortgage rates aren't budging, keeping the housing bubble aloft and wealth-effect consumption chugging along. Without renminbi revaluation, China seems set to keep amassing reserves, too, and income from reserve management doesn't seem "very important" to the People's Bank of China managers: in 2004 it is estimated that the PBOC lost at least 15-20bn renminbi in open market operations.

Which leads me to: fourth, the survey cited by the FT covered only
65 central banks that participated [which] control 45 per cent of global official reserves. Individually, they had up to $250bn under management.
With levels that small, we can rest assured that neither the Bank of Japan nor the People's Bank of China -- i.e. the ones whose opinions really matter re the dollar -- were among those questioned.


At 5:53 AM, Blogger Mark said...

However the housing market has now slumped and effecting the world economy in-directly.


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