What if the dollar falls? – Wednesday 31st December 2003 By Magnus Grimond

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Asian treasuries pull US strings
The levers of power may, in any case, lie outside the hands of the US authorities. The worry is that many of those Treasury bonds – equivalent to gilts – that the federal government has been selling to underwrite its spending have ended up with Asian countries whose exporters have been enjoying the fruits of US demand. But this build-up of US assets in Asia has been rising much faster than America’s trade deficit with that part of the world.

According to the investment banking arm of HSBC, Japan’s trade imbalance at $48bn in the first nine months of the year is roughly the same as in 2002. However, the increase in its foreign currency reserves has been $133bn, some $84bn more than the trade deficit with the US. On a smaller scale, this pattern is repeated across most of the region. So far this year there has been a build-up assets totalling $153bn more than the trading imbalance would warrant. Little wonder that foreign investors now own 46% of the US Treasury bond market.

This was all very well when the dollar was appreciating and bond prices rose. Those T-bonds were an increasingly valuable asset. But since the dollar peaked in 2002 and yields on bonds started to rise this summer, that happy combination no longer applies. Asian investors are sitting on depreciating assets.


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