Foreign Investors Worried About U.S.
From the Persian Gulf to Beijing to Zurich, there is increasing skittishness about the health of the U.S. economy and the wisdom of our economic policies. Bernanke’s kowtowing to the powers-that-be on Wall Street did nothing to allay those fears.
-Dean Calbreath, San Diego Union-Tribune financial columnist, September 23
In the not so distant past, overseas investors gladly acquired American dollars and financial assets. However, more and more evidence is surfacing that these investors are starting to question the wisdom of investing in the United States. The decision by the Fed last week to cut its benchmark interest rate by a half point to 4.75%, and the subsequent downward pressure on the U.S. dollar that it generated, raised eyebrows overseas. While the move was intended to calm the recent financial turbulence in the United States, it also caused foreign investors to sell dollars and move their cash into other markets where interest rates are rising and whose economies appear better off. Earlier today the dollar index, which measures the greenback against a basket of six currencies, touched a new 15-year low of 78.213. Jim Awad of W.P. Stewart Asset Management told the Wall Street Journal on September 23, “Washington wouldn’t mind an orderly [dollar] decline — [but doesn’t] want a headline emotional decline. That would force foreign investors to unload dollar-denominated assets and tie the Fed’s hands [on] interest rates.” So far this year, the dollar is down 8% against a weighted basket of major currencies, according to the Federal Reserve. Dean Calbreath of the San Diego Union-Tribune remarked on September 23 that:
The U.S. dollar has plummeted to the extent that- if you judged our economy by the euro rather than the dollar- it is as if we have been in a recession for the past seven years. Judged by euros, the Dow Jones industrial average is still well below the highs it hit in 2000.
In fact, Jack Ablin of Harris Private Bank noted in the Wall Street Journal last week that while growth in the S&P 500 is up almost 8% in dollars year-to-date, it is only a miniscule 1% when denominated in euros.
Prior to the Fed’s action on interest rates, the evidence already existed that overseas investors were shying away from U.S. financial assets. In July, foreigners sold a net $9.4 billion in U.S. Treasury bonds, one of the largest sell-offs on record. As of last year, foreigners held 45% of U.S. Treasury bills, 33% of U.S. corporate bonds, and 19% percent of U.S. agency notes. Declining foreign investment in the United States could have a broad impact on financial markets and American consumers. An Associated Press article from September 25 discussed what might happen:
If foreigners’ buying habits change, that could have a broad impact on financial markets- and U.S. consumers, too. For instance, if they sell their U.S. Treasury holdings, or don’t buy new government bonds or notes, then Treasury prices will go down and yields will go up. That will likely send mortgage rates higher since they are pegged to the 10-year Treasury note. That could unravel any good that has come from the Fed’s rate-cutting action and put the economy in a precarious spot. It makes you wonder why this administration isn’t doing more- or anything- to help the dollar.
For years the enduring myth among foreign investors had been that it was profitable to hold on to U.S. dollars and financial assets. However, faced with the harsh reality of seeing their holdings decrease in value and receiving a lower rate of return, I can understand them having second thoughts about partnering with Uncle Sam.
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