So many perma-bears on the buck have outlined the doomsday scenario for the dollar in recent years that you probably know it by heart. I can recite the “dollar doomsday” call in my sleep; it goes something like this...
1. The gapping U.S. current account deficit and Washington’s chronic budget deficits can only be financed by the benevolent actions of investors abroad willing to finance said deficits, but this cannot go on indefinitely.
2. Overseas investors are getting tired of watching their U.S. dollar holdings fall in value. Therefore, they’re likely to pull the plug at any moment and stampede out of the buck with massive selling of dollar denominated assets including Treasuries, stocks, corporate bonds ... you name it – they will be dumping it!
But a funny thing is happening to the dollar on its way to the dump – don’t look now you perma-bears on the buck – but the greenback is rallying! Shhh!
Can the Dollar as Endangered Species Make a Big Comeback... Just Like the Eagle?
As my colleague Sean Hyman recently wrote: “Just when everyone was about to put the “buck” on the endangered species list, the U.S. dollar came back with a vengeance. Lately, the hunted dollar has actually become the hunter.”
Far from finding dollar-denominated assets distasteful to hold, overseas investors are actually buying into the beleaguered U.S. dollar at an even faster clip these days.
In fact, according to just-released Treasury Department data, net foreign purchases of U.S. securities surged to $118 billion in October, up from $56 billion the month before.
Offshore buyers snapped up $30 billion worth of U.S. stocks, and a whopping $87.8 billion worth of U.S. corporate bonds.
That’s the biggest single-month bond buying binge on record for corporate bonds! Net purchases of U.S. Treasuries jumped close to a record, thanks to private investors, while foreign banks preferred corporate bonds. Those among the biggest buyers include Japan, Great Britain, Brazil, and the OPEC nations.
The Dollar-Pit and the Pendulum
So it would appear rather than selling the weak dollar, overseas investors are backing up the truck to buy with both hands – perhaps sensing that dollar-denominated securities are a bargain after the multi-year slide we’ve seen in the buck.
We already know that oil rich Middle Eastern Sovereign Wealth Funds (SWFs) are on the prowl in America, snapping up (perceived) bargains like Citigroup. And China’s SWF is likewise hunting for “strategic” investments in U.S. financial assets, such as private equity firm Blackstone Group. The latest Treasury data show that other offshore buyers are likewise being attracted to bargains in dollar-based assets.
All this buying may continue to give the maligned greenback a lift in 2008. According to Sean Hyman, “Now it’s time for the pendulum to swing the other way. You’ll see the dollar get a bit of a breather and recoup some of the ground that it’s lost.” Stay tuned!
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