"Charles Buckley"

. And, when it
comes to China, until we reach an agreement
with them concerning the exchange rate, don't
expect much cooperation between the governments
on governmental projects.

It look to me like the banking community can tolerate US trade deficits
or budget deficits, but not both. China has been forced to issue lots of
yuan in order to buy up all the dollars that they have coming in. And
then they use the dollars to buy our public debt. It may turn out that
by the time the Chinese get around to re-valuing the yuan, it won't be
necessary. The yuan is a bargain at the current artificial rate, but as
the dollar falls it will stop being a bargain and will arrive at its fair
value, at least from the US perspective. It will still be cheap to
Japanese and Euro buyers.

I don't understand all the complexities of the banking business, but it
is obvious that if foreign investors withdraw capital from a particular
region, the economy there suffers for it. (Higher interest rates would
slow the economy for one thing.) Here is a recent survey of the
situation.

-------
Foreign Interest Appears to Flag as Dollar Falls
By EDMUND L. ANDREWS

NY Times
Published: November 27, 2004


WASHINGTON, Nov. 26 - Investors and market analysts are increasingly
worried that the last big source of support for the American dollar -
heavy buying by foreign central banks - is fading.

The anxiety was on full display Friday, when the dollar abruptly slid to
a record low against the euro after a report suggesting that the Chinese
central bank might start to reduce its holdings in the American currency.

Though Chinese officials later denied the report, and the dollar
recovered, analysts say the broader trend is that foreign governments are
becoming less willing to finance the growing debt of the United States
government.

On Tuesday, a top official with the Russian central bank said his
government had become worried about the sinking value of the dollar and
might switch some foreign reserves to euros.

A day later, India's central bank hinted that it was worried about the
same issue and might shift some reserves into other currencies.

Japan and China, which together have amassed nearly $900 billion in
United States Treasury securities, have both slowed their buying sharply
from the frenetic pace in February and March.

"There is an emerging consensus that banks around the world are moving to
expand their reserves of euros at the expense of dollars," said Laidi
Ashraf, chief currency analyst at MG Financial Group in New York.

The Bush administration has essentially condoned the dollar's decline. At
meetings with foreign ministers last week, the Treasury secretary, John
W. Snow, repeated the American mantra of support for a "strong dollar"
but also for letting "market forces" determine exchange rates.

A continued decline of the dollar would be good for American
manufacturers, because it would make exports cheaper in foreign markets
and push up the cost of imports.

But a diminished foreign appetite for dollars could push up interest
rates. The Federal Reserve has already raised short-term rates four times
this year, but the shift in the sentiment of foreign investors may soon
seriously affect long-term rates that influence the cost of home
mortgages.

"Sell U.S., buy Europe," summed up Richard Berner, chief United States
economist at Morgan Stanley, in a report last week. Mr. Berner noted that
investors have begun demanding higher yields for 10-year Treasury
securities than for comparable European bonds, and he predicted that the
spread would widen.

Recent data from the Treasury Department indicated that foreign
governments had sharply slowed their purchases of Treasury securities.
The question is whether those purchases will continue to slow or start to
increase again as countries try to shore up the American currency to help
maintain their own industries' competitiveness.

Japanese purchases of Treasury securities, which ballooned by about $100
billion from October 2003 to March of this year, have slowed sharply and
actually declined slightly in September.

Largely as a result, the dollar has sunk to its lowest level against the
Japanese yen, about 102.5 yen to the dollar on Friday, in four and a half
years.

Chinese purchases of Treasury securities slowed to a crawl, increasing
just $2 billion in September, to $174 billion.

On Friday, a top Chinese central bank official denied reports in a
Chinese newspaper that the government planned to reduce its holdings of
Treasury bonds.

But Chinese officials, under prodding from the Bush administration, have
repeatedly said they want to gradually relax their 10-year-old policy of
locking its currency, the yuan, at a fixed exchange rate to the dollar.
Any move to a more flexible exchange rate for China would probably cause
the dollar to drop in value and allow the Chinese central bank to stop
buying United States debt securities.

America's current account deficit, the broadest measure of its
indebtedness to other countries, is on track to exceed $600 billion next
year, about 6 percent of its gross domestic product. The United States
needs to attract about $2 billion a day to keep its spending at current
levels.

The nation attracted enormous sums of foreign money in the late 1990's as
well, but the character of that money has changed. Back then, a big part
of the inflow was through foreign direct investment and purchases of
American stocks.

This year, by contrast, foreigners have been net sellers of stocks. The
big growth has been in foreign purchases of Treasury securities, and the
big buyers have been foreign central banks that wanted to prevent their
own currencies from rising too much against the dollar.

Tony Norfield, currency strategist for ABN Amro in London, said he was
convinced that central banks were trying to scale back their purchase of
dollar assets, a move that could push the euro, already up about 30
percent in the last years, even higher.

"You do not need the central banks to sell Treasuries for the dollar to
go down," Mr. Norfield said. "All they have to do is buy less and the
dollar is going to be in trouble."

The euro hit a new high of $1.3329 on Friday in light trading, before
settling back about a half-penny.

European leaders are alarmed about the potential damage of a sinking
dollar to their exports.

"Recent moves on exchange markets of the dollar versus the euro are
unwelcome," said Jean-Claude Trichet, president of the European Central
Bank, at a banking seminar on Friday in Rio de Janeiro.

"I want to underline the importance of recent statements by the Treasury
secretary of the United States on his determination to pursue a strong
dollar policy," Mr. Trichet added.

But Mr. Snow and Alan Greenspan, the chairman of the Federal Reserve,
offered no hint that they would intervene in currency markets to prop up
the dollar.

"The market for U.S. Treasury securities is deep and liquid and continues
to be attractive to a broad and diverse pool of investors," a spokesman
for Mr. Snow, Robert Nichols, said.

That remains to be seen. According to the most recent Treasury data, the
biggest source of growth in securities came not from China, Japan or
Europe but from Caribbean banking centers.