From: rakeshb@stanford.edu
Date: Mon Jan 20 2003 - 01:43:43 EST
Fate of the Sliding Dollar Could Be Decided in Asia By CRAIG KARMIN and KAREN RICHARDSON Staff Reporters of THE WALL STREET JOURNAL With the dollar in its worst slide against major European currencies since 1987, most of the attention has focused on European investors' jitters and what that means for the U.S. currency. But that may be the wrong place to look for answers. Analysts now say the most important action in determining the fate of the dollar this year may be unfolding in another corner of the globe, as Asian investors have become crucial swing players. ASIA'S NEW MUSCLE . In Big Turnaround, Asia Becomes World Financier1 Japanese, Chinese and other Asians collectively have become the biggest overseas investors in U.S. securities, bypassing the Europeans late last year in terms of net new money pumped into U.S. stocks and bonds. Asians last year accounted for 40% of the foreign-investment flows into the U.S., double the amount they contributed just two years ago. This support has provided a much-needed counterbalance to Europe's pullback. And while it hasn't been enough to spark a recovery in the dollar, it has ensured that the decline has been gradual, even orderly. "Asians are America's bankers right now," says Joseph Quinlan, global economist for Johns Hopkins University's Center for Transatlantic Relations in Washington, D.C. Following years of robust investment in U.S. securities, Europeans steadily scaled back their purchases of U.S. stocks last year. They worried that the dollar looked overvalued and that U.S. stocks appeared expensive compared with share prices elsewhere. The series of corporate-governance and accounting scandals last year also spooked European investors, encouraging flight to non-U.S. assets. Through October, European net purchases of $152 billion in U.S. securities were down 35% from the same period a year earlier. Moreover, investors in the 12 countries participating in the euro turned net sellers over the 10-month period for the first time since 1993. The resulting decline for the dollar has been stark. Since the start of last year, the dollar has tumbled 16% against the euro, 17% against the Swiss franc and 10% against the pound sterling. And a growing number of foreign-exchange analysts predict it will get worse, with many forecasting the dollar to fall an additional 4% to 8% against the European common currency by the end of the year. But at the same time, Asian investor appetite for U.S. securities, primarily Treasury and federal-agency bonds, has intensified. Asians were net purchasers of $156 billion in U.S. assets for the first 10 months of 2002, after averaging only about $47 billion a year during the 1990s. In Asia, "everybody has a fairly large portion of their portfolios in the U.S. agencies because of the large amount of liquidity and the very efficient way they issue," says Zhu Kai, head of treasury at the Bank of China, one of the mainland's largest banks and one of the region's largest U.S. dollar investors, with a portfolio worth tens of billions of dollars. Like other investors, Asians have been drawn to the relative safe haven of U.S. Treasury bonds following the Sept. 11 terrorist attacks: South Koreans, Taiwanese and Chinese poured money into the U.S. bond market and helped drive a rally in Treasury bonds. Asian demand for U.S. securities has also been rooted in a more self-serving reason: The region's central bankers have been buying U.S. assets to keep their own currencies relatively weak and help their exporters. In Japan, the central bank was sporadically buying dollars last fall to prevent the yen from strengthening too much against the U.S. currency. Even so -- and despite Japan's anemic economy and stock market -- the yen rose 10% against the dollar last year. Asia is awash with dollars to invest -- some $950 billion in excess liquidity sloshing around the region's banking system in reserves, portfolios and deposits -- largely as a legacy of the Asian financial crisis of 1997-98. That calamity spurred Asian governments, banks, corporate treasurers and individuals to stash their reserves and deposits in U.S. dollars after they saw the value of their local currencies crushed. All those dollars with nowhere to go fueled a phenomenon known as the "Asian bid" -- money that traditionally went into high-quality, dollar-denominated bonds issued by Asian borrowers, such as local conglomerates and regional banks. But now, with an average of just $40 billion of Asian dollar-denominated debt being issued annually, the Asian bid is scouring the global capital markets for more lucrative but still high-quality investments. In Thailand and Korea in particular, local fund managers with excess dollars will buy dollar-denominated bonds from other Asian countries and swap the debt back into their own currency to take advantage of a favorable exchange rate. While U.S. Treasurys remain the most popular and safest bet for most Asian investors, more are beginning to diversify and are moving slightly lower down the credit scale. Most Asian central banks are limited to holding only the highest-quality, triple-A-rated sovereign and corporate debt, but some Asian fund managers, insurance companies, corporate and government treasurers and increasingly private banks are diversifying into more obscure, and in some cases riskier, credits. Among the big U.S. borrowers attracting interest from Asian investors are the Ford Motor Credit unit of Ford Motor Co., General Electric Co. and Freddie Mac. Meanwhile, European borrowers are targeting Asians not only with dollar-denominated debt, but also issuing euro and sterling bonds through private placements and structured products, exclusively to Asian investors eager to diversify. Asian enthusiasm for European issuers such as the European Investment Bank, Lloyds TSB Bank PLC, Standard Chartered PLC's Standard Chartered Bank and high-yielding telecom companies has been particularly strong. As a result, "Our portfolio is now undergoing a slow but consistent trend of lowering its proportion in U.S. Treasurys," says Bank of China's Mr. Zhu. The concern now is over how much longer the Asian support can last. There are anecdotal signs that Asian central bankers are beginning to diversify their holdings into other currencies, especially the euro, at the expense of the dollar. Analysts fear that a U.S.-led war in Iraq could further accelerate that trend. "If Asians pull back from investing in the U.S., there isn't much else to support the dollar," says Rebecca McCaughrin, an economist at Morgan Stanley. In November, Japanese investors were buyers of $5.3 billion of U.S. securities while buying $9.1 billion of securities from euro countries. That marked a notable pullback from the first 10 months of the year, when Japanese investors favored U.S. over European assets by nearly six to one. Foreign-exchange analysts have been predicting such moves since the euro was introduced in January 1999: Asian central bankers will diversify their assets by adding euro-denominated securities. Mr. Quinlan says this rotation occurs frequently when the dollar loses ground against the euro, though it usually reverses when the dollar rebounds. Recent geopolitical events, however, seem to favor the euro. A war in Iraq is expected to be bearish for dollar assets, especially if it appears that the U.S. economy would be paying the bulk of the war's expenses. One hint of that is the rally in the price of gold, seen as an alternative to more conventional U.S. investments; since Sept. 11, the price of gold has surged 31% to $356.80 an ounce, near a six-year high on the Comex division of the New York Mercantile Exchange. North Korea's saber-rattling could also weigh on the dollar if the country is the beneficiary of Asian aid that would otherwise have been invested in the U.S. "The reunification of the Koreas could trigger a wholesale reallocation/restructuring of Asia's massive savings pool," Mr. Quinlan wrote in a recent report. Write to Craig Karmin at craig.karmin@wsj.com2 and Karen Richardson at karen.richardson@wsj.com3
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