Foreigners boost U.S. securities holdings as dollar slides

There may come a day when fears about foreigners wanting to dump their U.S. Treasury securities will amount to something. But we clearly aren’t there yet, even as the dollar keeps sinking in value.

Net foreign purchases of Treasury bonds and notes in September totaled $44.7 billion, up from $28 billion in August, according to the government’s latest report on cross-border investment flows.

Total net foreign purchases of U.S. long-term financial assets (stocks, corporate bonds and government bonds) in September came to $55.7 billion, up from $37.5 billion in August.

In the 12 months through September, foreigners bought a net $333 billion of Treasury notes and bonds. That was down 9.5% from the amount of net purchases in the 12 months ended September 2008, but still shows a robust appetite for U.S. debt. Good thing, too, given the record federal budget deficit.

The falling dollar has made U.S. securities cheaper for foreigners whose currencies are strong. But it also devalues their existing holdings.

Despite their rumblings of concern this year about the pace of U.S. borrowing and about the dollar, the Chinese remain the biggest single foreign owner of Treasury securities (including bonds, notes and bills), at $798.9 billion in September, Treasury data show. That total was up from $727 billion at the start of the year.

Japan is the No. 2 holder of Treasuries, at $751.5 billion, up from $626 billion at the start of the year.

Whom do we owe? The full list of the largest Treasury owners, by country, is here.

-- Tom Petruno

Photo: The Treasury Building in Washington. Credit: Andrew Harrer / Bloomberg News

Bad combo: Speculators fear 'double-top' in key markets

Has the "carry trade" become too tired to carry on in the short term?

Thursday’s session in global markets saw a reversal of the recent rush into gold, emerging markets and stocks in general, and a rebound in the beaten-down dollar.

That spurred talk that the army of hedge funds and other speculators engaging in the carry trade -- the popular (maybe too popular) strategy of borrowing in dollars at rock-bottom interest rates to invest in risky assets worldwide -- might be getting anxious to lock in gains after markets’ powerful run since July.

"It’s prime time to take some profits," said Michael Woolfolk, currency strategist at Bank of New York Mellon.

The percentage changes in markets Thursday weren’t huge -- the Standard & Poor’s 500 index lost 1%, to 1,087.24, while the DXY index of the dollar’s value against six other major currencies rose 0.7% -- but some traders were pointing nervously to a potential "double-top" pattern on their charts. (Think: Bactrian camel.)

The S&P 500, for example, pulled back Thursday after briefly surpassing the 1,100 level. The index also had failed to hold above that level after topping it intraday on Oct. 21. That prior failure gave way to a sell-off that took the S&P down as low as 1,030 by Nov. 2, a drop of more than 6% from the Oct. 21 high.

The same potential double-top pattern may be playing out with the euro, which in recent days has made another attempt to push decisively through the $1.50 level, without success. The European currency ended Thursday at $1.485.

The euro also peaked out around $1.50 on Oct. 26, then fell to near $1.46 by Nov. 3, before making another run for $1.50 this week.

In the case of the euro and other favored targets of the carry-traders, "You couldn’t take out the [October] highs today, so some traders are throwing in the towel," fearing a serious loss of momentum, said Brian Dolan, currency strategist at Gain Capital Group in Bedminster, N.J.

Some traders also may be wary of betting further against the dollar in the near term with the U.S. again jawboning for a "strong" greenback and amid reports that Thailand, Russia and other countries have been buying dollars to try to slow their own currencies’ advances against the buck.

The point is, if the carry trade is about to see a respite, the dollar could get a bounce -- and all of the things bought with borrowed dollars could shift into reverse for a while.

-- Tom Petruno

Dow at new one-year high as stocks jump worldwide

The bears are being routed worldwide today as investors find plenty of reasons to buy stocks and not many reasons to sell.

The Dow Jones industrial average was trading at a new one-year high at about 11 a.m. PST, up 176.84 points, or 1.8%, to 10,200.26. That tops the recent closing high of 10,092.19 on Oct. 19.

Other major U.S. indexes also are up sharply, though still below their recent peaks. The Nasdaq composite, up 34.30 points, or 1.6%, to 2,146.74, is within 1.4% of its closing high of 2,176.32 on Oct. 19.

Today’s rally is rooted in faith that the global economy won’t go back into the soup. That sentiment got a boost after finance ministers and central bank chiefs of the G-20 nations met over the weekend in Scotland and pledged not to rush to remove fiscal and monetary support programs.

"We agreed to maintain support for the recovery until it is assured," the group said in a statement.

That helped stoke investors’ appetite for risk-taking as markets opened today. Emerging-market stocks are among the day’s biggest gainers. The Indian market jumped 2.1%, Russian stocks surged 5% and the Brazilian market is up 2.4% so far.

Commodity prices also are broadly higher, led by oil, corn, cotton and gold, with the yellow metal at a new all-time high of $1,102.20 an ounce, up from $1,095.10 on Friday.

With risk takers on a roll, the dollar is the day’s loser -- but it’s clearly not hurting the mood on Wall Street. The DXY index of the dollar’s value against six other major currencies is down about 1%.

As for concerns that the U.S. House’s passage of the $1.1-trillion healthcare reform bill would hammer medical-related stocks -- well, not today. Most major drug stocks are trading higher (Merck is up 65 cents to $33.24) and an index of 11 big HMO stocks, including Wellpoint Inc. and UnitedHealth Group Inc., is up 1.5% to a new 52-week high.

Even the bond market is cooperating with stock bulls today: Despite the dollar’s slide Treasury bond yields are flat compared with Friday.

-- Tom Petruno

Photo: Richard Drew / Associated Press

The dollar rises, and (almost) nobody is happy

Blame the almighty dollar -- or, uh, the slightly less anemic dollar.

Friday’s big sell-off on Wall Street and in the commodity pits was accompanied by another rise in the greenback’s value against other major and minor currencies.

The DXY index, which measures the dollar against six other key currencies, rallied 0.5% to 76.3, the sixth increase in seven trading sessions.

The euro fell to $1.472, down from $1.501 a week ago. The dollar was worth 1.76 Brazilian reals, up from 1.72 a week ago.

The dollar had mostly been declining since late April, a reflection of global investors’ willingness to abandon the relative haven of the U.S. currency for riskier assets -- including emerging-market stocks and raw materials.

And with U.S. short-term interest rates near zero, investors also have taken to borrowing in dollars to fund purchases of investments worldwide. That’s the so-called carry trade.

But in the last two weeks, as worries have mounted about the strength of the U.S. economic recovery, the dollar has staged a modest comeback.

On the face of it, that’s counterintuitive: If the U.S. economy struggles, shouldn’t that mean a weaker dollar?

It should, over time. But in the short-term, concerns about the U.S. stoke fears about the global economy as well. And that is helping to drive some investors and traders out of the riskier assets that have been so popular since March, and into "safer" things -- including U.S. Treasury securities.

"It’s the unwinding of the carry trade," said Marc Pado, U.S. market strategist for brokerage Cantor Fitzgerald.

As long as that’s going on, it’s bullish for the dollar.

It’s no coincidence that the recent low for the DXY index -- 74.97 on Oct. 21 -- also marked the recent high for the Reuters/Jefferies CRB commodities index. The CRB index is down 4.8% since then, including Friday's 2.1% drop.

Crude oil futures fell $2.87 to $77 a barrel on Friday, the lowest price since Oct. 14.

The iShares Emerging Markets Index exchange-traded stock fund has tumbled 9.6% from its recent high reached Oct. 14, as stock markets in Brazil, South Korea, India and other emerging economies have tripped.

Why, though, should U.S. stocks fall just because the dollar rebounds? The fundamental reason is that a stronger dollar hurts U.S. exporters by potentially raising prices of their goods abroad.

But the knee-jerk reaction of traders may be a bigger factor kicking the U.S. market lower: If hedge funds and other traders are buying the dollar they’re automatically going to be selling U.S. stocks, just as they were simultaneously selling the dollar and buying stocks for much of the last seven months.

As long as the formula works, there are plenty of players for this game.

-- Tom Petruno

Bad timing for some stock mutual fund buyers

One group of investors must have been particularly relieved to see the stock market’s sharp rebound Thursday: The folks who jumped into mutual funds last week, giving stock funds their first week of net cash inflows since mid-August.

It looks like some of them might have waited, waited, waited -- and then barreled in just before equity markets took their biggest spill since early July.

As I’ve noted on many occasions over the last two months, individual investors have been ravenous for bond mutual funds since spring, while their interest in stock funds has waned as the market has continued to rally. The vote for bonds over stocks has been a strong sign of how risk-averse many people have remained since markets crashed last year.

In September alone, even as the Standard & Poor’s 500 index surged 3.6%, U.S. stock mutual funds had a net cash outflow of $11.2 billion, meaning redemptions exceeded new purchases by that amount.

By contrast, bond mutual funds had a huge net inflow of $47.4 billion in September. The data come from the funds’ trade group, the Investment Company Institute.

But it appears that some investors couldn’t resist the lure of stocks as major market indexes worldwide jumped to new one-year highs in mid-October. After nine straight weeks of net outflows, stock funds overall (domestic and foreign) had a net cash inflow of $1.68 billion in the seven days ended Oct. 21, the latest data available.

Foreign funds took in a net $2.9 billion in the latest period, the most since mid-June. Domestic funds had a net outflow of $1.2 billion, but that was the smallest outflow since mid-August.

Some of the new buyers (and would-be sellers who delayed) quickly were facing remorse: The S&P 500 reached a one-year closing high of 1,097.91 on Sept. 19. It then slid 5% in the seven following sessions through Wednesday.

The Russell 2,000 index of small-company stocks dived 9% in the same period.

The losses also were heavy in some foreign markets. The Brazilian market tumbled 10.5% from Oct. 19 through Wednesday; the German market slid 6.1%.

On Thursday, though, stocks resumed their climb on news that U.S. economic growth in the third quarter was stronger than expected. The S&P 500 rallied 2.2%, the Russell 2,000 jumped 2.4%, Brazil’s main index shot up 5.9% and the German market recouped 1.7%.

-- Tom Petruno

Another vote for global recovery: Canada posts surprise job gain

Hopes for a sustained global economic recovery got another lift today when Canada reported an unexpected jump in employment.

That could put Canada in line to follow Australia in raising short-term interest rates. In a surprise, the Australian central bank on Tuesday boosted its benchmark rate to 3.25% from 3%, after declaring that "the risk of a serious economic contraction" Down Under had passed.

The Canadian bond market seems more than a little worried about the prospect of higher interest rates: The annualized yield on two-year Canadian government notes rocketed to 1.71% today from 1.33% on Thursday.

The Canadian dollar rose to 95.9 U.S. cents from 94.4 cents on Thursday, the highest in more than a year, even though the beaten-down U.S. currency was rebounding against most other currencies. The Toronto stock market was off modestly after four days of gains.

From Bloomberg News:

Canada’s jobless rate unexpectedly fell last month, signaling that the U.S.’s largest trading partner has begun an economic recovery that may lead the central bank to increase interest rates within the next year.

Employment rose by 30,600, six times more than forecast, on new jobs in construction and government, Statistics Canada said today. The jobless rate fell to 8.4% from 8.7% in August.

The central bank lowered its benchmark lending rate to 0.25% in April and pledged to keep it there through June 2010 unless the inflation outlook changes materially.

"The risks of them going sooner rather than later are increasing at the moment," said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto, adding he still expects the bank will wait until the middle of next year to raise borrowing costs.

Canada, which like Australia is a major commodities exporter, should benefit from rising raw materials prices if the global recovery picks up steam.

But the government downplayed the gain in jobs in September, saying employment was boosted by federal stimulus programs. And because the U.S. buys most of what Canada exports, the Canadian economy’s outlook still depends in large part on the U.S. outlook.

"My big concern remains the U.S.," Prime Minister Stephen Harper told reporters today. "Even though we’ve had some good jobs news today, we aren’t out of the woods yet."

-- Tom Petruno

A dollar meltdown? Not today

The dollar is having a tough day, but this isn’t a meltdown -- despite what the hot action in the gold market might suggest.

The DXY index, which measures the dollar’s value against six other key currencies (euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc) was at 76.32 at about 1:15 p.m. PDT -- a decline of just 0.4% from Monday’s level of 76.64.

The index fell as low as 76.10 today, but even that was above the recent low of 75.83 on Sept. 23. And there’s still quite a bit of breathing room above the decade low of 71.33 reached in April 2008.

The euro has risen to $1.472, a modest gain of 0.4% from $1.466 on Monday.

The wild move today in gold, up $21.90 to a record $1,038.60 an ounce, hinted at a bigger hit to the dollar. Gold often plays the roll of the anti-dollar.

But the greenback's decline "has been very orderly -- it’s nothing to alarm policymakers" in Washington or overseas, said Dan Katzive, a currency strategist at Credit Suisse in New York.

The world can live with an eroding dollar, as it has for most of this decade. But no one wants a sudden collapse.

One catalyst for today’s decline in the buck was a fresh rumor that Middle Eastern oil exporters want to move away from pricing crude in dollars on the world market, to escape the penalty they face from a weaker U.S. currency.

But that rumor has been around for a long time, and it still isn’t clear to anyone how that might actually happen.

"I don’t attach a lot of credibility to it," said Brian Dolan, currency strategist at Gain Capital in Bedminster, N.J.

The biggest reason for the dollar’s renewed weakness may just be greater optimism that the global economy is coming out of its funk, as reflected in the Australian central bank’s decision to raise its benchmark short-term interest rate.

That highlights the gulf between near-zero U.S. rates and rates in the rest of the world, and pushes more money toward the countries with higher rates.

Investors betting on a recovery drove U.S. stocks sharply higher today -- the Dow industrials closed up 131.50 points, or 1.4%, to 9,731.25 -- but also poured money into many foreign stock markets, which automatically benefits other currencies at the dollar’s expense.

-- Tom Petruno

 

 

Japan's slippery slope: No letup in deflation

The latest data on Japanese consumer prices show the country remains in the icy grip of deflation -- a timely reminder to central bankers everywhere of how pervasive falling prices can become once an economy slips into that mode.

Japan’s consumer price index in August was down 2.2% from a year earlier, the Statistics Bureau reported Tuesday. That matched the decline in July.

Excluding fresh food, prices were down 2.4%, a record annual decline.

Measured from a year earlier, prices were off more sharply in August than in July in five of 10 major categories of goods and services, and were up in just one category: education.

Food prices were down 0.1% in August from a year earlier, furniture prices were off 3.1%, and transportation and communication costs tumbled 7.6%.

Although the steep year-over-year decline in energy prices has put downward pressure on consumer price indexes worldwide in recent months, falling prices are more prevalent in Japan.

Its index of consumer prices excluding food and energy was down 0.9% in August from a year earlier. By contrast, U.S. consumer prices were up 1.4% last month excluding food and energy.

From Reuters in Tokyo:

"Falls in oil prices are the main reason for the decline in prices. But the economy is also stagnating, and we can see that in price declines for durable goods and also services that are relevant to consumers," said Atsushi Matsumoto, an economist at Mizuho Research Institute.

"The Bank of Japan has said annual price declines will start to slow, but it's taking a long time for this to happen, showing that deflationary pressure isn't decreasing."

Japan has been battling deflation for much of the last 20 years as its economy has struggled to revive after the bursting of the country’s stock market and real estate bubbles beginning in 1990.

A misguided decision to begin tightening credit in 2000 -- while consumer prices were in a renewed decline -- has haunted the Bank of Japan ever since.

-- Tom Petruno

Photo: In a Tokyo mall last month. Credit: Tomohiro Ohsumi / Bloomberg News

Dollar's weakness may be too much, too soon for U.S. trading partners

Looks like there’s finally some foreign pushback against the weak dollar -- although maybe not enough to stop the trend.

Japanese Finance Minister Hirohisa Fujii, who recently has been supportive of the yen’s latest surge against the greenback, sounded less sure in comments today -- after the dollar slumped below 90 yen to its weakest level since February.

The dollar fell to as low as 88.24 yen, down from 89.90 on Friday and 97 in mid-August. The yen's strength hammered shares of Japanese exporters, pushing the Nikkei-225 stock index down 256.46 points, or 2.5%, to 10,009.52, the lowest since July 24.

From Reuters:

Fujii, who has said recently that a stronger yen could benefit the economy, said recent moves in currency markets had been a bit one-sided and that it was wrong to see his comments as a license to push the yen higher.

"Some people in the markets are distorting my comments. At the root [of the yen's rise against the dollar] is a U.S. policy. But markets will correct themselves soon," Fujii told reporters.

The remarks came just hours after Fujii told Dow Jones newswires that current moves were "not abnormal" and added that "foreign exchange dumping" to defend Japanese exporters would be wrong.

Fujii further sought to contain the market fallout from his earlier comments, telling a seminar on Monday that he had never said he would leave a yen rise "as it is."

In Europe, meanwhile, European Central Bank President Jean-Claude Trichet said a strong dollar was "extremely important" for the global economy.

The euro fell to $1.459 today from $1.467 on Friday. It reached a one-year high of $1.479 last Tuesday.

The dollar has mostly been losing ground against other currencies since April, in part as rebounding financial markets worldwide have encouraged investors to abandon the buck as a haven and invest elsewhere.

World leaders at the Group of 20 meeting last week agreed on a strategy to reduce the world’s reliance on U.S. consumers. That would imply stronger foreign currencies, which would give foreign consumers more purchasing power (and mean less purchasing power for Americans).

But dollar weakness is bad for foreign exporters, and neither the U.S. nor its trading partners want to see the greenback in a free fall that would shake global confidence.

The dollar’s slump has been a boon for U.S. investors in foreign stocks and bonds this year because it means securities denominated in foreign currencies are automatically worth more when translated into dollars. The German stock market, for example, is up 19.3% in euros year to date, but its gain in dollars is 25%. Australia’s market is up 26% in Australian dollars and 55% in U.S. dollars.

-- Tom Petruno

Photo: Japanese Finance Minister Hirohisa Fujii. Credit: Haruyoshi Yamaguchi / Bloomberg News

The dollar's in the dumpster, and nobody's worried -- for now

"A strong dollar is in America’s best interest," the Bush and Obama administrations have repeatedly assured us.

And yet for most of this decade the dollar has been sliding. Now, the greenback again is one of the world’s currency weaklings. But global financial markets, and governments, seem to be taking it in stride.

The dollar has taken a renewed pounding over the last two weeks, driving the DXY index -- which measures the buck’s value against six other major currencies -- to nearly a one-year low.

The euro has been the big winner as the U.S. currency has lost ground. The euro was at $1.47 on Thursday, its highest level since last September and up from $1.42 on Sept. 1.

But the dollar’s troubles haven’t set off alarm bells in Washington. Nor have the Chinese raised a new stink about the buck’s weakness and the devaluation threat it poses to their American asset holdings.

The lack of a ruckus this time reflects that the dollar is dropping for the right reasons, currency analysts say.

For one, investors worldwide are feeling better about the global economy, which is pulling money out of the classic hiding place of the dollar in favor of  riskier assets, including emerging-market stocks.

"A lot of money is coming out of safe-haven dollar bets," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.

Investors and traders also are reacting normally to the interest rate differential between the U.S. and other countries: With U.S. short-term interest rates lower than those of most other nations, and the Federal Reserve in no hurry to raise them, the dollar naturally is at a disadvantage to currencies in countries with higher rates.

Yet even as the greenback has lost ground in recent weeks, there doesn’t appear to be a rush out of U.S. Treasury bonds by foreigners whose assets are devalued with each tick lower in the dollar. The yield on the 10-year Treasury note, at 3.39% on Thursday, was unchanged from its level on Aug. 31.

What's more, Wall Street has continued to rally, pushing major market indexes to 11-month highs.

The dollar's decline "doesn't seem to be impacting U.S. stock or bond markets," says Sophia Drossos, a currency strategist at Morgan Stanley.

Meanwhile, there are some key constituencies for whom the buck's losses are a blessing. U.S. exporters obviously love a sliding dollar because it makes their products cheaper for foreign buyers. And because most commodities are priced in dollars, oil and other raw materials get cheaper for countries with strong currencies.

At the same time, discounted U.S. goods and services become more of an attraction for foreigners looking to vacation here.

For U.S. investors who own foreign stocks and bonds the dollar's drop this year has brought a windfall, just as it did for most of 2002 through 2007. A lower dollar means securities denominated in strong foreign currencies are worth more when translated to dollars.

The Canadian stock market is up 28% in Canadian dollars this year, but it's up 47% in U.S. dollars. The Australian market is up 26% in Aussie dollars -- and 56% in U.S.

But as with all currency moves, there are losers in the buck's stumble. Foreigners' U.S. assets are declining in value (or, in the case of stocks, aren't rising as much). At some point, foreign exporters in Europe, Japan and elsewhere are likely to start screaming about an unfair trade disadvantage. If they're forced to mark up prices of their goods, we'll import inflation. Lastly, Americans who were thinking about foreign vacations may have to reconsider.

The big question is how low the dollar will go. For now, it's still above the worst levels (or best levels, depending on your perspective) of 2008. But it's getting closer to those depths. If it breaks through, there will be a new torrent of speculation about the dollar losing its status as the world's primary currency, and about the risk that that would entail for an economy so dependent on foreign creditors.

Americans have been warned for decades about a possible dollar panic if the world were to lose faith in us. The current decline is no panic. Neither we nor the rest of the world can afford for it to turn into one.

-- Tom Petruno