Dollar at mercy of central banks
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The US Has Become Dependent
By Chris Giles
Financial Times Economics Editor
Published: January 24 2005 02:00
news.ft.com
During the past few years the US has become dependent, not so much on millions of investors around the globe but on a few individuals in a few of the world's central banks.
In 2003, the most recent year with full international statistics, central banks financed 83 per cent of the US current account deficit, with Asian central banks accounting for 86 per cent of flows.
A similar picture is emerging for 2004. Despite a good start to the year, when the private sector was a large net purchaser of dollar assets, central banks came to the rescue again. The People's Bank of China has let it be known that China increased dollar reserves by $207bn (€159bn) in 2004, financing nearly a third of the US current account deficit, estimated at $650bn.
Self-interest has supported much of this flow of cash. The US has lapped up cheap finance to fund its unquenchable appetite to spend. Asian governments have until now been keen to oblige, in order to keep their currencies from appreciating. But all investors have their limits and they may start worrying about their degree of exposure.
If new official flows to the US were to be curtailed, the dollar would plunge, creating a huge hole in the accounts of central banks holding dollars.
"The risk exposure for Asian central banks is already great," concluded Matthew Higgins and Thomas Klitgaard of the Federal Reserve Bank of New York in a recent paper.
In November, Alan Greenspan, US Federal Reserve chairman, suggested foreign investors would reach a limit in their desire to finance the US current account deficit and diversify into other currencies or demand higher US interest rates, "elevating the cost of financing" the deficit and "rendering it increasingly less tenable".
Until recently there had been little evidence to back up these fears but this has begun to change. Members of the Organisation of Petroleum Exporting Countries have cut the proportion of deposits held in dollars from 75 per cent to 61.5 per cent in the past three years.
The Bank of Thailand said this month it was considering reducing the proportion of its $50bn reserves held in dollars from 80 per cent to 50 per cent. Russian officials have made similar noises.
A detailed survey out today suggests that central banks are increasingly moving official reserves out of the dollar and into the euro.
Asian central banks are unlikely to pull the plug on dollar assets altogether. But they may be close to ending their willingness to provide cheap financing for an ever increasing US current account deficit. |
