And now WSJ indicates that Capital Flows are Shifting Against the US Dollar........
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September 26, 2001
Cross-Border Capital Flows Begin
To Shift Against the U.S. Dollar
By MICHAEL R. SESIT and SILVIA ASCARELLI
Staff Reporters of THE WALL STREET JOURNAL
LONDON -- After supporting the dollar for about two-and-a-half years, cross-border flows of capital are finally beginning to shift against the U.S. currency. The consequence, say many currency analysts and economists, will be a weaker dollar.
While there has been no stampede to sell the dollar, some fund managers in Europe say they are reducing their exposure to the currency.
Take Rothschild Asset Management. On Monday, the London firm, which manages 26 billion pounds ($38.03 billion or 41.5 billion euros), began selling U.S. and European bonds and used the proceeds to buy Continental European shares that its fund managers feel have been unduly hammered since the Sept. 11 terrorist attacks in the U.S.
Continental markets have fallen more than those in the U.S. and the United Kingdom, says Philip Barleggs, the London-based firm's head of asset allocation. For example, the German DAX Index at one point was down more than 40% this quarter. "Forty percent is astonishing," he says. "Yes, things have changed. But they haven't changed that much." His firm also expects the euro to climb gradually toward 95 U.S. cents or a bit higher by year end.
Further north, Edinburgh Fund Managers is poised to shift money in the same direction: into Europe and out of the U.S. -- although Iain Beattie, the group's deputy chief investment officer, sees no need to rush. His team of analysts is still identifying individual companies whose share price has been beaten down, yet whose balance sheets are strong enough to ride out the economic downturn. "Unless there's another move down in Europe that would hasten [more funds into Europe], I think we can take our time," he says.
Downgrading Estimates
Messrs. Barleggs and Beattie are the kinds of decision-markers who are prompting currency forecasters to downgrade their estimates of where the U.S. currency is headed over the next year.
On Tuesday, Citibank revised its one-month and three-month forecasts for the euro to 92 U.S. cents, up from 90 cents and 87 cents, respectively. It raised its six-month projection to 94 cents from 92 cents. Meanwhile, the big U.S. bank also lowered its one-, three- and six-month dollar forecasts to 117 yen, 120 yen and 120 yen, respectively, from 120 yen, 123 yen and 126 yen.
Last week, Deutsche Bank lowered its dollar forecasts, and Shahab Jalinoos, a foreign-exchange strategist at UBS Warburg in London, said his firm may well do likewise soon.<b. "Our equity-flow product, which had been dollar-positive for most of the year, has turned around," he said, referring to UBS Warburg's proprietary system of measuring equity capital flows, based on what the firm's clients are buying and selling. Last week, it recorded the biggest net outflow in the three-and-a-half years of its existence.
"While the terrorist attacks this month seems to have exacerbated net outflows from the U.S., the trend in any case had turned against the U.S. even before the crisis began," said Mr. Jalinoos. "With the dollar dependent on capital inflows, this is a bearish development for the greenback."
A weaker dollar should help make U.S. goods more competitive on world markets. At the same time, it would reduce the value of U.S. assets held by European investors, while enhancing the value of European stocks and bonds owned by Americans.
Late afternoon Tuesday in New York, the euro stood at 92.25 cents, up from 91.66 cents late Monday, while the dollar edged higher to 117.60 yen from 117.57 yen, the day before.
Period Appears to Be Over
Why are Europeans increasingly looking to sell U.S. assets? Edinburgh's Mr. Beattie said the firm had been underweight European equities for most of the year. But Europe's period of lagging behind U.S. market performance should be over, particularly if a U.S. economic slowdown hits the U.S. harder than the rest of the world, as he expects. He is also encouraged by the European Central Bank's decision last week to cut interest rates and expects more is to come. And like Rothschild's Mr. Barleggs, he figures the dollar is losing some of its appeal, in part because European companies are no longer spending large amounts of money on U.S. acquisitions, a process that requires them to buy dollars. Mr. Beattie expects the flow of European acquisitions of U.S. companies to slow even further in the next nine months.
Citibank currency strategists point out that July -- the latest month for which data are available -- was the second consecutive month in which the euro zone reported net inflows in both the foreign direct investment and portfolio-investment account categories.
Capital flows will be "pretty much the whole story" behind the dollar's impending weakness, said T.J. Marta, a Citibank strategist in New York, adding that net outflows from the U.S. "will swamp" any benefits resulting from a U.S. economic recovery. "We don't expect the net inflows into the U.S. to re-establish themselves to the levels they have in the past," said Mr. Marta.
Even so, he stressed that the U.S. isn't facing "the nightmare scenario," in which its inability to fund the $450 billion deficit in its current account -- a wide measure of goods and services -- could lead to either a plunging dollar or sky-high U.S. interests rates to attract foreign capital. "It's just a medium-term leveling off, no nightmare, no dollar crash," Mr. Marta said.
The dollar is still above where it began the year against both the euro and the yen, and the euro is 21% below where it stood when launched on Jan. 1, 1999.
Also weighing on the dollar are deteriorating U.S. consumer confidence and falling oil prices. Because petroleum is paid for in dollars and because Japan and Europe are huge net importers, lower oil prices reduce their need to convert yen and euros into dollars. What's more, European bond yields have become more attractive relative to U.S. yields, and Citibank strategist Steve Saywell noted that ,i>10-year U.S. government bonds are yielding about 3.3% more than their Japanese equivalents, the smallest gap since February 1999.
"Flows are the story behind the dollar-yen and euro-dollar," he said. "The U.S. is going to find it increasingly difficult to fund its current-account deficit."
In the first half of this year, net foreign investment in the U.S. remained high, but a smaller proportion of that volume went into equities and a larger portion went into U.S. agency and corporate bonds. "What you see is an asset reallocation on the part of foreign investors from equity into debt," reflecting an increase in risk-aversion, said Paul Meggyesi, director of currency research at Deutsche Bank in London.
Thus, while the quantity of inflows has been roughly the same, there has been a change in the quality of inflows. "That's important, because going forward, we can expect an increase in risk-aversion; that will likely encourage investors to move away from corporate debt," said Mr. Meggyesi. "The issue is do they go into Treasurys or forsake the U.S. entirely for their home markets?"
Given this evidence, currency analysts are surprised that the dollar -- which has fallen 3.1% against the euro and 3.6% against the yen since the Sept. 11 terrorist attacks -- has held up as well as it has. "One theory is that because Americans own more European stocks than Europeans own American stocks, selling [European stocks] and repatriation [of the proceeds] by U.S. investors has been holding the dollar up," says Mr. Jalinoos of UBS Warburg.
Strategists at BNP Paribas also note that European insurance companies have been selling European shares and converting the proceeds into dollars to help cover any liabilities that might arise from the attacks on the World Trade Center. And "instead of military support, most European countries will offer logistical and financial support to the U.S., suggesting an additional demand for dollars," said Ian Stannard, a currency strategist at BNP Paribas in London.
In addition, many institutional investors already hold fewer dollars than their benchmarks call for. That, said analysts, will temper any dollar decline, because there are fewer dollars to be sold. As for the yen, Japan's economy is a mess, and the central bank has been selling yen and buying dollars to weaken its currency. |
