The U.S. Dollar is Finally Getting Invited Back to the Investment Party
The buck is up 6% against the euro in the last three weeks. Notwithstanding problems in Greece and Spain, and the attendant complications for the E.U., this is a pretty good performance.
Illustrating an important lesson. Don't count the dollar out too soon.
Over the past months, many analysts have done just that. Forecasting a terminal decline in the dollar against other currencies, and against hard assets like gold, base metals, and oil.
That negative sentiment spilled over into the bond markets. I've read commentary after commentary lately calling for the collapse of U.S. government bonds. These analysts believe investors will increasingly shun U.S. bonds as America runs large deficits.
The deficits are certainly real. The U.S. government has already run $388 billion in the red through the first three months of the fiscal year (October to December).
But this is nothing new. At the same time last year, the fiscal-year deficit stood at $331 billion. Not much below the year at hand.
And last year was a record for U.S. bond purchases. America sold $2.1 trillion in bonds during fiscal 2009. Up 40% from the $1.5 trillion issued in fiscal 2008.
Whenever I mention this fact to dollar bears, they have deflections. Most of this buying came from the Federal Reserve. Or from captive U.S. banks directed by Treasury to use their now-massive excess reserves in purchasing government debt.
I'm willing to keep an open mind about these things. The numbers say the Federal Reserve bought $290 billion in Treasuries in fiscal 2009 (amounting to only 14% of total purchases). And I've yet to find any evidence U.S. banks are investing excess reserves in Treasuries (the Fed has a special interest-bearing facility set up for excess reserve deposits).
But maybe I'm wrong. The numbers could be rigged. There could be funny businesses going on behind the scenes on Wall Street.
It's getting harder and harder, however, to write off the U.S. bond market.
The latest sign of life is a return of foreign buying.
Foreigners largely fled U.S. bonds in fiscal 2009. Foreign buying of Treasuries and Agencies for the year totaled just $220 billion, down 55% from $505 billion in fiscal 2008. Foreign purchases accounted for just 10% of American bond buying last year. By far the lowest total in the last 10 years (the previous low was 33% in fiscal 2008).
But foreigners have been in the market lately in a big way. In November 2009, foreign buyers picked up a record $118 billion in Treasuries. So far this fiscal year, foreigners accounted for 28% of bond purchases.
It's difficult to dismiss this groundswell as a U.S. government trick. Yes, there are issues with America's deficits. Yes, the nation's finances are probably not sustainable. But other currencies have their own thorns. And investors are still interested in dollar-denominated instruments as a place to park their money.
Two, five or ten years down the road that may change. But for now, reports of the dollar's demise are, well, you know.
Here's to resiliency,
By. Dave Forest of Notela Resources