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Fears for dollar as central banks sell US assets

Financial Times | May 16, 2005
By Christopher Swann

The world's central banks were net sellers of US assets in March for the first time since September 2002, according to figures that may hint that the recent rebound in the dollar will be temporary.

Central banks sold a net $14.4bn in US assets during the month, the largest sale since August 1998, the US Treasury revealed. Asian central banks, however, continued to accumulate reserves, with their stockpiles rising by about $30bn over the month.

“For those central banks that are not managing their currencies, there may well be a feeling that the dollar is not a great bet,” said Adam Cole, currency strategist at RBC Capital Markets

Economists says these sales may be a sign that central bank officials fear the dollar downtrend will at some point resume. The most conspicuous sale was by the Central Bank of Norway, which sold $17bn of US Treasuries.

Private-sector inflows into the US remained robust in March at $74.5bn, only slightly down from $79.4bn in February.

“It does seem that when private sector investors are willing to buy dollars, the central banks are happy for any excuse to offload part of the mountain of dollars they have accumulated,” said David Bloom, currency strategist at HSBC.

Demand for US Treasuries was boosted by $28bn of net purchases from the Caribbean region, the highest level in at least four years. Analysts associate banking centres in the Caribbean with hedge funds.

Some analysts suggest that hedge fund buying of US government bonds in recent months may be associated with unwinding failed bets in which the funds were short on Treasuries while owning riskier, higher-yielding debt.

Among the central banks, reserve accumulation has been particularly aggressive in Asia, where many of the banks have been anxious to prevent a rise in their currencies from choking off export growth.

The US dollar fell by about 30 per cent against floating currencies from its peak in February 2002 until the end of last year. But since then it has bounced back just over 5 per cent.

Many currency strategists believe the dollar downtrend will resume. “The cyclical picture for the US still looks very good for the dollar,” said Ray Attrill, director of US research at 4Cast, an economic consultancy. “But there are no convincing signs that the current account deficit is getting better and this should eventually weigh the dollar down again.”

Although the US trade deficit narrowed in March from $60.6bn to $55bn, most economists believe this was due to a shortlived slowdown in US demand and the timing of the Chinese new year. Last year the current account deficit was $666bn, or 6 per cent of gross domestic product.

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