FT Alphaville wrote an essay on economic nationalism once. It got a first (an A for you Americans). So we would know.
Bank of America analysts would, presumably, know too. They’re continuing their doomed dollar series with this chart:
That’s Fed custody holdings, or the volume of Treasury securities being held by the Fed for foreign account holders. You can see it soared in early October (probably as countries like China bought dollars/bonds to intervene in their own currencies) but is now levelling off.
Bank of America’s Robert Sinche explains the significance (emphasis is ours):
… the international community is shifting its focus from reserve accumulation to domestic economic stability.
Russia is liquidating accumulated reserve holdings (almost $150bn since August) to support its domestic economic/financial system while South Korean reserves have fallen by $50bn in a similar effort. China has pledged a massive fiscal stimulus (accounting details aside) in an effort to rejuvenate its domestic economy, reducing its level of aggregate savings that can flow into foreign markets. Even Brazil announced this week that it will potentially use part of its small sovereign wealth fund (SWF) to support its domestic economy.
Given this growing tide of “economic nationalism,” funding the U.S. internal and external deficits may become a source of legitimate concern for the USD entering the new year. And while it is early for these forces to unfold, there already has been a noticeable slowing in the rate of growth in custody holdings of Treasury and Agency securities at the Fed for foreign central banks and official institutions.
Couple those current account problems (the US deficit looks set for another record year, something like 7 per cent of GDP according to BoA) with collapsing yields and you have further downward pressure on the USD. As BoA notes:
This period of extreme risk aversion may enable the world’s reserve currency to maintain its value on global markets, but the combination of low real yields, low domestic savings and high borrowing needs is not one that appears sustainable indefinitely.
For what it’s worth, BoA thinks dollar weakness won’t really start showing up until the first-half of next year.
…in 1H 2009 as the repatriation process slows, foreign savings are utilized for domestic policy initiatives and flows into low-yielding US assets remain sluggish. That is an environment in which even the world’s reserve currency could begin to suffer, leaving the USD and its asset markets at risk of underperformance.
Related links:
The doomed dollar? - FT Alphaville
Dollar *danger* ahead - FT Alphaville
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