Dollars for sale, tuppence a bag…
Excellent editorial in today’s IHT:
During the worst of the markets’ recent volatility, many investors moved their money into supersafe U.S. Treasury securities, temporarily boosting the dollar against the euro and the British pound. But of late, the dollar has resumed its downward trend of the past several years. And policymakers and currency traders are once again hypervigilant for signs that Asian central banks might redeploy part of their dollar-based debt holdings into non-American investments.
Such diversification – particularly by China, which is believed to have some $1 trillion – could further weaken the dollar, presaging higher interest rates and higher prices in the United States.
But Asian bankers, it turns out, are not the only ones to watch.
According to a new study by Stephen Jen, a currency economist at Morgan Stanley, American investors may be a more powerful force than their foreign counterparts in driving the dollar down.
Currency markets generally punish heavily indebted nations by pushing down their currency. In the absence of policies to boost domestic savings – and thereby slow the build up of debt – a steady decline of the dollar implies a steady decline in American living standards. A sharply accelerating decline would imply severe economic distress. By diversifying out of dollars, American investors seem intent, at least in part, on reducing their exposure to either eventuality.
I’m just glad, frankly, to see someone discussing the effect of depreciating dollars on US interest rates and inflation. It’s well-worth two minutes of your time (longer, obviously, if you take a while to read. I don’t want people reading for two minutes, stopping mid-sentence, and feeling cheated or anything).