Over the past four months, it is estimated that China alone has dumped over $300 billion in their dollar based reserves, signalling a trend in which the Far Eastern economy is now using their treasuries to protect their own slowing economic conditions. And with Japan, Europe, and the emerging markets all showing signs of recession rather than growth, one has to ask if the dollar’s strength is actually based on foreigners moving into the dollar as a safe haven, or if it is because external economies are now dumping their debt en masse.
Liquidity and velocity of money have a lot to do with the strength and weakness of a given currency, especially if that currency is the global reserve. And it appears now in the case of the dollar that relative strength may be tied more towards bond holders dumping their dollars and the Fed moving them out of the markets than from any pursuit of dollar purchases that would still have this currency in play for global use.
As shown in the chart below, following an increase of $17.4 billion in September, foreign net sales of Treasuries hit an all time high of $55.2 billion, surpassing the previous record of $55.0 billion set in January. In absolute terms, October’s total foreign holdings by major holders declined to $6,046.3 trillion the lowest since the summer of 2014.
What is the reason? There are two possible explanations, the first being that foreigners are unloading US paper (ostensibly to domestic accounts) ahead of what they perceive an imminent Fed rate hike which would pressure prices lower, or more likely, the ongoing surge in the dollar and collapse in commodity prices continues to pressures foreign reserve managers to liquidate US Treasury holdings as they scramble to satisfy surging dollar demand domestically and unable to obtain this much needed USD-denominated funding, are selling what US assets they have.
Should this selling continue or accelerate in the coming months and if it has an adverse impact on TSY yields, it may also force the Fed’s tightening hand if, as some expect, the liquidation of foreign reserves becomes a self-fulfilling prophecy and leads to a material drop in Treasury prices. – Zerohedge
And out of all the possible reasons why, perhaps this more than anything since the September disappointment is why the Fed has little choice but to raise rates today.
Around 2/3ds of all dollars are currently held in foreign countries, and by nations outside the U.S., meaning that any big change from owning dollars to instead dumping them will have a tremendous effect on the U.S., and the reserve currency. And as economies around the world begin to slowdown and show signs of a global recession, yields on holding treasuries need to provide a much more enticing return versus the desire to sell these instruments for use in other assets or monetary programs. Thus the bottom line is that we are now seeing the beginning salvos towards the extrication of the dollar from the global monetary system, and without a way to get this debt working in the Fed’s favor, all they will be able to do is purchase it themselves and continue to make the dollar artificially stronger before it finally disappears.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com, Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.