Dollar at mercy of U.S. debt financing
By Yoshiko Mori
TOKYO, Aug 30 (Reuters) - The dollar will have to depreciate further to enable the United States to finance its ballooning current account deficit, says the chief economist at Japan's fourth-largest brokerage.
``The fundamental cause of the dollar's weakness lies in the fact that the U.S. current account deficit has grown too large to be stably financed by the surpluses of Japan and Europe,' Kazuo Mizuno, general manager of the Economic Research Department at Kokusai Securities Co, said in an interview.
To help close the gap of more than $100 billion, the United States has two policy options -- let the dollar fall further, or depress consumers' overspending by tightening credit.
Rising interest rates could eventually trigger a downward correction in rallying U.S. stock prices, which Mizuno said have given an excessive boost to U.S. consumers' purchasing power.
``Both policies, which I believe have already been put in place, would in theory make U.S. assets a bargain for global investors by reducing their price in foreign currency terms,' Mizuno said.
To make the dollar a good buy, the U.S. also needs to achieve a gradual drop in the dollar rather than a nosedive that would scare away much-needed foreign capital.
Foreign capital is critical in financing the U.S. deficit, which reflects deficits in both the corporate and consumer sectors. The U.S. personal savings rate fell further in July to a negative 1.4 percent.
In recent months, Japan has played a key role in moderating the dollar's fall by aggressively buying the currency.
``Without the BOJ's recent dollar support, the dollar could have fallen through 100 yen by now,' Mizuno said.
The Bank of Japan spent an estimated $37.76 billion to defend the sagging U.S. currency against the yen in June and July.
Mizuno warns, however: ``Even if policies to lure foreign capital are adopted, they cannot automatically boost the ability of Japan and Europe to provide funds to the United States.'
Capital flows from surplus countries are also determined by their fiscal policies and investment and savings trends, he said.
Until mid-1998, the United States successfully procured as much foreign capital as its financing needs required through a strong dollar policy, propagated by then-U.S. Treasury Secretary Robert Rubin, and a good economic performance.
But in the second quarter of 1999, the U.S. current account deficit rose to an annualised $301.7 billion, far exceeding the combined $202.3 billion current account surplus of the 11-nation euro zone and Japan, according to data provided by the European Central Bank, the Bank of Japan and the U.S. Commerce Dept.
The U.S. financing gap has leapt further than the calculated difference between its deficit and the world surplus as Japan has been repatriating the bulk of money invested in U.S. markets since August 1998, he said.
``Global capital flows have changed course dramatically since August last year, when the Russian and Latin American crises broke out,' Mizuno said.
``Japanese investors were awakened to the enormous risks involved in overseas investment when they saw the dollar's quick tumble following the Russian crisis.'
The dollar fell from 146.50 yen in mid-August, 1998 before the Russian crisis, to 128.10 yen on September 11, 1998.
Japanese financial institutions' aversion to risk has escalated as they commit themselves to balance sheet cleanups and capital replenishment, a condition for receiving trillions of yen in public fund injections into the tottering banking system.
Japanese have turned net sellers of U.S. bonds, unloading 453.9 billion yen ($4.09 billion) on an annualised basis since the fourth quarter of 1998. They had been net buyers of an annualised 2.9966 trillion yen from the first quarter 1995 to the third quarter of 1998.
The United States has managed to keep European capital in its asset markets by keeping the stock market steady with three credit easings after last summer's Russian crisis, Mizuno said.
But the departure of Japanese money has dealt a heavy blow, and the United States has had to recall capital invested in Europe and Latin America, he said.
U.S. investors have pulled $79.7 billion from European securities markets and $12.8 billion from Latin American stock markets on an annualised basis since the fourth quarter of 1998.
>>>Negative savings rate, two-thirds of public with under
>>>$ 5,000 in savings, phantom 'surplus', ...
>>>'Surplus' and still needs foreign money to fund the
>>>Treasury.
>>>Sounds like the bubble is in the government first and
>>>foremost. |
