Financial Daily from THE HINDU group of publications
Thursday, Jan 27, 2005
Money & Banking
Widening US trade, budget deficits begin to hurt Dollar losing favour with most central banks
Brussels , Jan. 26
THE world's most prominent 65 central banks which control $1.7-trillion worth of assets have taken part in a survey whose results have been published.
They display a marked change of attitude over the past two years in the background of ever widening American trade and fiscal deficits. This is highlighted by a dramatic decline of the dollar as central bankers boost their current holdings in euro and display a marked shift of turning away from the US currency.
It is revealed that at the end of 2003, the central banks held 70 per cent of their reserves in dollar-dominated assets and their purchases of the American securities financed 80 per cent of the US current account deficit. All that is fast changing as these banks move into euro. As one central banker put it: " central banks' enthusiasm for the dollar is cooling off."
The latest revelation cannot be rated as an eye opener but confirms more pessimistic perceptions of the global financial community about the state and health of the US economy.
Greenspan warning: As Mr Alan Greenspan, Chairman of the US Federal Reserve, warned in November that there was a limit to "willingness of foreign governments to finance the US current account deficit."
The prominent Bush administration officials, including the President himself, have displayed eerie enthusiasm to contain the challenges posed by ever widening US current account and trade deficits; but this is widely interpreted a "futile exercise in rhetoric".
There is also much disappointment in key European and Asian markets that the Presidential address by the re-elected Mr George Bush highlighted the cause of democracy and freedom, but made no reference to the decline of the dollar and widening trade and revenue deficits.
In recent months the US has become more dependent on few central banks rather than on millions of foreign investors to finance its trade and revenue deficits as the latest statistics reveal that 83 per cent of the US deficit is financed by foreign central banks.
With current spectre of central banks "cooling off" from the US and dollar, there is speculation about future trends and the debate is on for how long can such a scenario be sustained. The US current account deficit is currently hovering around $650-billion mark. Even OPEC has cut the proportion of dollar deposits from 75 to 60 per cent and Russia is following the same pattern.
Bitter reality: Leading Asian central banks are also adjusting their exposure to the-dollar related securities. Although no central bank is likely to pull the plug on dollar assets, the reality is that many of them are switching into euro assets. Sixteen of the responding central banks in the latest survey say they have cut their exposure to yen and three quarters of those bankers have increased their euro exposure.
It is argued that plunging dollar could be the big risk facing President Bush in his second term and although the jury may be out for years on the US inflation, the verdict on the dollar has quickly come in. I
t also remains to be seen, if the weak dollar can create demand for the US manufactured goods and services and the current reality is that the impact is at "best insignificant".
China is not likely to oblige by revaluing its currency and China now accounts for a quarter of the American trade deficit.
The dollar has fallen at all-time low against the euro and recent appreciation in value of the dollar may not be sustained.
Hence, the growing external deficits of the "world's sole superpower" is causing concern as the US has "put the global economy on a path that is not merely sustainable but dangerously so" - as analysts put it.
The world has also displayed an insatiable and perhaps dangerous hunger for American assets. However, slowly but surely all that is fast changing, if; latest findings of the central bank survey are any criterion.
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