Investors Flee US Treasuries -
$50bn Down To $4.2bn
Dollar Hits Record Low Against Euro
By Jennifer Hughes in London
And Jenny Wiggins in New York
Financial Times - UK
11-20-3
The dollar fell to a record low against the euro yesterday as data
showing sharply weaker capital flows prompted news fears over the
funding of the US current account deficit.
Treasury figures showed net capital inflows into the US fell from
$50bn in August to $4.2bn in September, the lowest since the near
collapse and bailout of the Long Term Capital Management hedge fund
rattled markets in 1998.
The euro rose two cents to $1.1953 against the dollar, beating its
previous high of $1.1933, set in May.
The data raised fears that the US may have difficulties funding its
current account deficit, which ran at about $45bn a month in the first
half of the year.
"The September data is the strongest evidence to date that the record
current US account deficit has become too large to finance through the
net foreign investment into US securities, and is thus contributing to
the long-term decline in the US dollar," said Michael Woolfolk, senior
currency strategist at the Bank of New York.
Fears of a trade war involving the US also put the dollar under
pressure after the US Commerce Department said it was planning quota
restrictions on Chinese clothing imports.
The news follows a dispute with Europe and Japan over steel tariffs
that could escalate into a bigger trade war.
Tony Norfield, head of currency strategy at ABN Amro, said: "This
raises overseas concerns over just how far the US will go in appeasing
various domestic lobby groups, it makes investing in the US just a
little more risky."
Economists said America's use of selective trade restrictions also
implied exporters were struggling with the strong dollar and that a
weaker currency was needed to sustain the US economic recovery.
There were also fears that China might retaliate by selling some of
its massive Treasury holdings, a move that would hurt the US Bond
market and would likely weaken the dollar further.
The report showed the fall in net flows came from declines across
numerous types of US financial assets. Foreign purchases of Treasuries
have fallen to their lowest, on a monthly basis, since February,
according to Lehman Brothers. The Treasury report said foreigners
bought a net $5.6bn of Treasuries in September, down from $25.1bn in
August.
Foreigners engaged in net selling of "agency" debt sold by
quasi-governmental agencies Freddie Mac and Fannie Mae for the first
time since October 1998, getting rid of a net $3.2bn after buying
$8.9bn the previous month.
The lack of interest in bonds was not replaced by the buying of
equities. Foreigners have sold about $6.3bn of equities but Japanese
buying of assets remain particularly strong, with about net $20bn of
debt and equity purchases.
Economists noted that the bulk of selling came from private accounts
and hedge funds, not central banks. Private foreign accounts sold $2bn
of Treasuries in September and $6bn of agency debt. Central banks,
which hold large foreign reserves, continue to favor US bonds.
"life is like a mushroom, they feed you ***** and keep you in the dark"
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