Saturday, June 30, 2007

Where Have These Guys Been?

Dollar `Vulnerable' to Drop in Investment, BIS Says
By Lukanyo Mnyanda
June 24 (Bloomberg) -- The dollar is ``vulnerable'' to a drop in the investment inflows that the U.S. relies on to fund its trade and current-account deficits, according the Bank for International Settlements.
The currency has been supported by purchases of Treasuries by foreign investors attracted to U.S. yields and central banks that buy dollars to curb appreciation in their exchange rates. Such investors now own a record 80 percent of Treasuries due in three to 10 years, according to research from HSBC Holdings Plc.
``The dollar clearly remains vulnerable to a sudden loss of private-sector confidence,'' the Basel, Switzerland-based BIS said in its 77th annual report today. ``The reliability of public-sector inflows has also become more uncertain.''
Central banks may reduce purchases of dollars and allow their currencies to strengthen in a bid to curb inflation, the BIS said. They may also invest a greater proportion of new foreign-exchange reserves outside of the U.S. to earn higher returns, adding to the ``threat'' to the dollar, it said.
Inflation in China accelerated to a two-year high of 3.4 percent last month, and a stronger currency would help curb gains in consumer prices by lowering the cost of imported goods.
``The fear of inflation is causing central banks in Asia to change their thinking away from interventionist policies,'' said David Bloom, global head of currency strategy at HSBC in London. ``They could slow down accumulation of reserves and let their currencies rise. Then the dollar will fall.''
Currency Reserves
The deficit in the U.S. current account, the broadest measure of trade because it includes some investment flows, reached a record $192.6 billion in the first three months of the year. The U.S. needs to attract about $2.1 billion a day to fund the gap, making the economy vulnerable to higher interest rates and a drop in the dollar should foreigners sour on its assets.
The U.S. currency fell 0.6 percent to $1.3470 per euro in the past week. The dollar dropped to a record low of $1.3681 on April 27. The euro has climbed 2.1 percent against the dollar this year.
Asian central banks from China to India boosted their currency reserves 58 percent to $2.2 trillion last year as they bought dollars, said the BIS, which was formed in 1930 to monitor markets and promote cooperation between central banks.
The Indian rupee has gained 8.6 percent against the dollar in 2007, compared with a 1.7 percent advance for the whole of last year. The Chinese yuan has climbed 2.4 percent so far this year, after rising 3.3 percent in 2006.
The People's Bank of China, which has the world's largest foreign-exchange reserves totaling $1.2 trillion, has said it will boost investments in bonds other than Treasuries. Japan, the biggest foreign holder of U.S. government debt, with $612 billion, has cut the investments this year from $623 billion.
Governments ``have already publicly expressed strong concern about excessive capital investments, and possible resource misallocations,'' the BIS said. ``In a number of countries, inflationary pressures are rising.''
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