In a further blow to the dollar’s standing, Vietnam and Qatar both announced that they are cutting their holdings of dollar assets. Note that this isn’t merely “diversifying away from the dollar” which could be accomplished by effectively reducing ongoing dollar purchases (both run trade surpluses which oblige them to buy dollars) via exchanging them, say, with euros. As FT Alphaville reports, they are taking the far more aggressive move of selling existing dollar holdings:
Announcements on Thursday from the Qatari and Vietnamese governments that they are rapidly divesting in dollar denominated securities will not come as good news to the US government. Overseas investors hold half of America’s $4,400bn of marketable government debt, up from a third in 2001 according to the US Treasury department.
Qatari Prime Minister, Sheikh Hamad bin Jassim bin Jabr al-Thani said on US TV that the government-backed $50bn Qatari Investment Authority (QIA) now had less than 40 per cent of its investments in dollars, down from a high two years ago of 99 per cent.
Given that the Emirate’s oil and gas revenue is in dollars, the latest troubles in the US economy have accelerated the need to diversify investments into non-dollar markets. Currencies such as the Euro, the British Pound and the Swiss Frank, are all looking far more stable as investments for the QIA, said Sheikh Hamad.
Such was the Qatari PM’s concern about the sliding dollar, that he even said an oil price of $125 per barrel would not be unreasonable.
On Thursday, the State Bank of Vietnam quietly let slip it would be ending its dollar purchase schemes, which it has been using to hold down the Vietnamese currency….
Cue dollar sale.
Asian investors have already pulled out of US Treasuries – as FT Alphaville reported in September, foreign government holdings of T-Bills fell 3.8 per cent in August.
Note that we have commented earlier on the Chinese and the Saudis moving away from the dollar.
Both Alphaville and the Telegraph stressed that Vietnam’s shunning of the dollar is more serious that it might seem on the surface, since it may encourage other Asian countries, which have been pegging their currencies against the dollar. It’s become increasingly difficult for these countries to continue with this practice, since all those dollar purchases have led to inflation (it is rampant in China).
From the Telegraph:
The Saigon Times said this morning that the State Bank of Vietnam was abandoning the attempt to hold down the Vietnamese currency through heavy purchases of dollars. The policy is causing the economy to overheat, driving up inflation to 8.8pc.
Vietnam, which has mid-sized reserves of $40bn, is seen as weather vane for the bigger Asian powers.
Together they hold $3,575bn of foreign reserves, over 65pc of the world’s total. China leads with $1,340bn, but South Korea, Taiwan, Singapore, and even Thailand all built up massive holdings.
The concern is that once one or two members of the region jump ship, it could set off a broader scramble. None of them want to be the last one left holding a devalued asset. Vietnam’s central bank said this week that it would move “gradually” to a floating currency…..
“OPEC and Asia have been the two blocks funding the US current account deficit,” said Hans Redeker, currency chief at BNP Paribas.
“Vietnam is a relatively small country but it is symptomatic of Asia. The entire region is seeing inflation move up as a result of mercantilist policies of holding down their currencies with ‘dirty floats’, which are designed to help their export sectors. They need to change monetary policy, ” he said.
America is in danger of getting what it wished for. It has been pressuring China to let the yuan float, and threatening trade sanctions if it doesn’t. But if the dollar falls sharply, not only would it be destabilzing to the world economy, but it could end the dollar’s status as the world’s reserve currency. One consequence is that US debtors would increasingly have to fund not in US dollars but in other currencies, meaning they would have to bear the foreign exchange risk.
And even if the US is lucky and has an orderly rather than disorderly fall in the dollar, Andy Xie (when he was still at Morgan Stanley) pointed out that US corporations would also take a hit. From MacroBlog:
I estimate that a significant share of the profits of S&P 500 companies come from mark-ups on cheap Chinese products. If the US Congress passes a serious protectionist measure against the China trade, the US stock market could be hit hard and the property market could follow.
The dominoes are falling, although not in the sequence Xie anticipated (but he also wrote this before the blowout phase of subprime mortgage issuance).