Tags: Dollar | will | Rebound

Treasurys 'Hot' Again, Dollar Will Rebound

By Monday, 24 March 2008 02:55 PM Current | Bio | Archive

It must be important news: the article was buried in the back of the paper, in the weekend edition.

"Treasurys Are Still Hot Overseas" the headline blares. A reassuring sub-headline follows: "Central Banks Add to Their U.S. Assets to Support Dollar."

According to the article, fears that foreigners are diversifying out of the dollar may be overblown.

That's because a weakened dollar has made central banks believe that the dollar is oversold and that U.S. Treasurys are "big bargains for non-U.S. investors."

New data show that Treasurys held by foreign banks and other international accounts rose to $1.28 trillion, up from $1.2 trillion this past September.

Though yields have been falling in line with Fed rate cuts, foreign banks apparently believe they are buying these dollar-denominated assets on the cheap and that the upside on appreciation is bigger than the paltry returns.

Leading the pack are the Japanese, followed by China. Gulf states like Saudi Arabia and the U.A.E. have been adding billions to their central bank holdings. (Despite having one of the largest foreign reserves, over $600 billion, Russia is the only major central bank that holds a small number of dollars.)

This foreign interest in Treasurys is welcome news for the dollar.

For several years in the Financial Intelligence Report (FIR) newsletter, published by the editors of MoneyNews, we have been dollar bears.

The largest reason was our belief that the U.S. government was understating inflation. The dollar was devaluing due to that inflation.

We hit a bull's-eye with our assessment. FIR investors made out like bandits as the dollar decline helped increase the Financial Intelligence Report's recommendations in select currencies, international equities and commodities.

Now we see the tide turning in the dollar's favor.

First, inflation is being tempered by the recession. We already see deflation in the housing sector. This year commodities will follow.

Second, the enormous outflow of U.S. dollars abroad have to go somewhere. The EU is already "overbought." Its long term prospects as a global competitor lag behind the U.S.

The emerging markets also are overbought. These markets will lead as global competitors. Still, capital markets there are not big enough to handle the inflows that have been pouring into them.

Thus, the U.S. remains the global reservoir partly because there is nowhere else to easily and safely place capital.

Third, the Federal Reserve's rate cuts typically hurt the dollar. But, so far, the differential between low U.S. rates and other central banks is not as great as it was when the Fed Funds rate hit a bottom of 1 percent and the dollar went into a tailspin.

There are significant implications for global investors for this dollar bottoming and rebounding.

To prepare yourself, I strongly advise you to get the most recent edition of the Financial Intelligence Report.

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It must be important news: the article was buried in the back of the paper, in the weekend edition. Treasurys Are Still Hot Overseas the headline blares. A reassuring sub-headline follows: Central Banks Add to Their U.S. Assets to Support Dollar. According to the article,...
Monday, 24 March 2008 02:55 PM
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