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Dollars For Sale

The International Herald Tribune writes:

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.

Jen notes that since 2003, American mutual funds have increased their allocation of overseas equities from 15 percent to 22.5 percent, a pace he describes as “gradual but determined.” If America’s other big institutional investors, such as pensions and insurance companies, have invested elsewhere at the same pace, he calculates that the outflow of dollars would now amount to $1.16 trillion, about the same as China’s total foreign reserves.

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Categories: Americas, Economics, USA
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