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To: Les H who wrote (11306)	10/25/2004 1:08:04 PM
From: Les H	Respond to of 29594

Sharp drop in USD after the election The authorities are now swimming upstream. Monthly data from the US Treasury reveal a sharp deceleration of foreign demand for dollar-denominated assets — $61 billion average net purchases in July and August versus a $76 billion average in the prior 10 months. This deceleration is worrisome for two reasons — the first being it has occurred against a backdrop of a dramatic widening of America’s current account deficit, which went from 4.5% in late 2003 to 5.7% in mid-2004. Second, private investors have already turned skittish on the dollar, forcing non-US policymakers to up the ante in filling the void. Over the 12 months ending August 2004, fully 33% of net foreign purchases of long-term US securities have come from the official sector — more than double the 15% share of the prior 12 months and over four times the portion over the 2000-02 period. With private inflows into dollars now going the other way at just the time when America’s external financing needs are exploding, extraordinary pressure is being put on Asian authorities to resist the inevitable. In the end, this is a losing game. Intervention cannot neutralize the deadweight of America’s massive current-account deficit. That’s the message to take from the recent fragility of the strong dollar. For what it’s worth, I suspect that the dollar’s slide will accelerate sharply in the aftermath of the US presidential election — probably more so in the event of a Kerry victory than would be the case in a Bush win. Senator Kerry’s focus on trade and jobs puts him more in the camp of embracing market-based resolutions to global imbalances. In either case, however, the dollar’s coming depreciation will pose a great challenge for an unbalanced global economy. The flip side of a weaker dollar spells currency appreciation elsewhere — forcing the export-led economies of Asia and Europe to embrace the reforms long needed to unshackle domestic demand. If Asia continues to resist, it faces a growing protectionist threat from both Europe and the United States. I remain convinced that the world’s unprecedented external pressures will be vented in one way or another — through markets or politics, or some combination of both.