Dollar’s slide hurting foreign investors
Dollar’s slide hurting foreign investors
With the US dollar trading at a five-month low, spare a thought for non-US investors invested in US stocks and bonds.
The graph below compares the performance of the US 10-year Treasury Note in US dollar terms (green line) with the same bonds from the viewpoint of a European investor (red line). (Although I am using the euro in this example, the same logic applies to most other non-US dollar currencies.) Since the peak of the US dollar against the euro on March 5, US investors have lost 2.6% on their Treasury investments, but euro investors are completely under water to the tune of -11.9%. The year-to-date numbers are down by 5.6% (US dollar) and 5.7% (euro) respectively.
Source: StockCharts.com
The next graph shows the S&P 500 Index in both US dollar terms (green line) and euro terms (red line). Whereas US investors have every reason to be pleased with a huge return of +27.7%, euro investors received a less sterling but nevertheless palatable +15.6%, given the magnitude of the rally. For the year to date the figures are +0.8% (US dollar) and -0.7% (euro).
Source: StockCharts.com
In the words of Richard Russell (Dow Theory Letters): “The US Dollar Index is sitting on what I term ‘the edge of the cliff’. If the dollar falls apart, we’re dealing with a whole new story – it will affect almost all investments, US and foreign. The sliding dollar is already putting pressure on Treasury bonds, particularly the long-term 30-year maturities. This is causing our creditors (think China) to cut back.”
Will the greenback turn out to be the Achilles heel of the US economy?
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May 27th, 2009 at 9:57 am
From one of Setser’s exhaustive posts:
” Russia’s central bank bought over $5 billion last week. A surge in intervention would explain the strong rise in the Fed’s custodial accounts over the last two weeks. They rose by over $50 billion in the last two weeks of data – a $100b monthly/ $1200b annual pace. That pace of reserve growth would allow the US to sustain it current account deficit.”
and
“The data suggests not all that much has changed – despite all the talk about China’s desire to find an alternative to the dollar. China still buying dollars to keep its currency from appreciating. Words and actions haven’t matched.”
http://blogs.cfr.org/setser/2009/05/26/2007-all-over-again-the-dollar-central-bank-reserves-and-us-bonds/#more-5489
May 27th, 2009 at 10:10 am
There is no way they will let the Treasury market blow up. You can expect a sell-off in equities instead.
Sell the SPOOS, Lloyd. Buy the TWOs.
May 27th, 2009 at 10:14 am
Will the greenback turn out to be the Achilles heel of the US economy?
….no, the Achilles heel will be the back-end loading nature of the bailout…it will require careful spending, higher taxes, higher interest rates for years to come…the medicine may make the future worse than the present-day disease…