Oct. 22 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the dollar's decline may reflect a growing unwillingness among foreigners to buy U.S. securities.
``Obviously there is a limit to the extent that obligations to foreigners can reach,'' Greenspan said in a speech in Washington yesterday. The dollar's decline to its lowest since 1997 may be ``an indication America is approaching this limit.''
Greenspan's warning came after the U.S. Treasury reported last week that international investors sold a record amount of U.S. stocks, bonds and other financial assets in August. Central banks and private funds are turning to currencies including the euro as financial markets outside the U.S. expand.
Sold them to whom? Who bought them?
Total overseas holdings of U.S. equities, notes and bonds fell a net $69.3 billion in August after an increase of $19.2 billion in July.
Rodrigo de Rato, managing director of the International Monetary Fund, speaking in Washington today, warned of the threat of a disorderly fall in the dollar. ``There are risks that an abrupt fall in the dollar could be triggered by, or itself trigger, a loss of confidence in dollar assets,'' he said.
Well d'oh.
The Fed's trade-weighted broad dollar index, a measure of the dollar against the currencies of U.S. trading partners, dropped to 99.49 on Oct. 19, the lowest level since 1997. The U.S. currency today fell to a record against the euro, trading at $1.4327 per euro at 10:15 a.m. in Tokyo.
Greenspan first predicted that investors abroad would tire of financing the U.S. current-account deficit in a Nov. 19, 2004, speech in Frankfurt. ``A diminished appetite for adding to dollar balances must occur at some point,'' Greenspan said as Fed chairman at the European Banking Congress three years ago.
Greenspan returned to that theme in a London speech in December 2005. After leaving the Fed, he told a conference in Tel Aviv in December that the dollar will ``continue to drift downward'' because it's unlikely that international investors will continue to increase their allocations to the U.S. currency.
The dollar's share of world foreign-exchange reserves has slipped as central banks sought alternatives to the currency in recent years. The dollar's proportion fell to 64.8 percent in June, from 71.8 percent seven years before, International Monetary Fund figures show. The euro jumped almost 8 percentage points, to 25.6 percent.
65% of the world's total reserve currency is in dollars? Ooh. Sky falling!
The liquidity and size of euro-denominated financial markets are approaching those of dollar markets, Bank of International Settlements economists Gabriele Galati and Philip Wooldridge wrote in a paper a year ago.
Ben S. Bernanke, Greenspan's successor, and Treasury Secretary Henry Paulson have repeatedly dismissed concern about international investors selling off their holdings of U.S. Treasury securities. Paulson noted in June that China's investments, the largest after Japan's, amount to about a day's worth of trading in the Treasury market.
One day's worth. Ooh! The sky is falling!
The last time you wrote that you put your foot in your mouth and then tried to quibble your way out of the basket.
So, I'm yawning. Only because I'm too sleepy to laugh at you any more or any less.
Sold them to whom? Who bought them?
Well d'oh.
65% of the world's total reserve currency is in dollars? Ooh. Sky falling!
One day's worth. Ooh! The sky is falling!
I don't know whether the sky is falling, but the dollar is and investors are increasingly less willing to finance our debt. Whether or not you may understand why, that spells trouble for us.
You asked what China provided and I told you one of many things. You squirmed and tried to shake it off. You can't.
I thought the text accompanying the graphic to which you referrred jedward was excellent.
The vast majority of China's U.S. reserves are held in low-yielding debt securities, primarily Treasury bills and notes and agency securities. This is money that China could have used to invest in environmental clean-up, improved public health provisions, a more secure pension system, or other currently unmet social needs in China. The value of these securities in yuan, and the interest income they generate, will drop sharply when the dollar is finally allowed to fall to a sustainable exchange rate, as it must. China's exposure to currency losses is escalating rapidly due to its massive purchases of foreign exchange reserves.
China isn't the only country moving away from financing our debt.