No support for the sagging dollar

published 30 October 2007

So much for a concerted attempt by the G7 to shore up the sagging dollar. The post-gathering communiqu made no mention of dollar weakness, thereby effectively providing "a green light" to sell the greenback, says Sue Trinh of RBC Capital Markets.

While Treasury Secretary Hank Paulson again said that a strong dollar was in America's interest, the currency has hit a new record low of over $1.43 against the euro and an all-time low against a basket of America's major trading partners' currencies. The strong dollar policy is widely deemed an ignore-the-dollar' policy, as one analyst put it; Washington appears content with the dollar's slide as it boosts exports and helps reduce America's massive current-account deficit, still at around 6% of GDP. A darkening outlook for the US economy is also putting pressure on the dollar, as it presages lower interest rates and thus a lower yield on American assets.

A further worry is that foreign investors are losing interest in US assets and thus won't plug the current-account gap. Last week brought news of a record net capital outflow of $163bn in August. Asian investors led by Japan, China and Taiwan dumped $52bn of US Treasury bonds, the first time since 1998 that foreigners have, on balance, sold Treasuries, says Ambrose Evans-Pritchard in The Daily Telegraph. Note that Asia's central banks are increasingly on the lookout for better returns on their foreign exchange holdings, says Chuck Butler on Dailypfennig.com. As the Fed cut rates in September, "I wonder how bad the numbers are going to look" when that month's data comes out.