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Foreign investors sell U.S. assets

Globe and Mail | May 16, 2005

International investments in U.S. securities dropped to $45.7-billion (U.S.) in March from $84.1-billion in February, the U.S. Department of Treasury said Monday, further evidence that foreign central banks may be diversifying their holdings away from U.S. assets.

The March inflows fell well short of the $70-billion economists polled by Bloomberg had expected. Moreover, it is below the $65-billion to $75-billion that is needed to cover the U.S. current account deficit and outflows of foreign direct investment, according to a report by Adam Cole, senior currency strategist at RBC Capital Markets in London.

Overseas central banks were net sellers of U.S. assets for the first time since September 2002, he wrote. March's selling of U.S. dollar-denominated assets by official holders was the largest since August 1998, he said.

The numbers suggest foreign buyers of U.S. securities may be concerned about the U.S. trade and current account deficits, both of which have ballooned to records in recent months.

On the other hand, foreign private investors, such as hedge funds, flocked to U.S. assets in March.

“With foreign central banks retreating from Treasuries, and U.S. investors showing a growing interest overseas, this report highlights the lingering downside risk to the U.S. dollar, despite the greenback's recent rally,” wrote Sherry Cooper, chief economist at BMO Nesbitt Burns, in a note. “Hedge funds are not a currency's best, long-term friend.”

Speculation has risen this year that Asian central banks are diversifying their holdings away from U.S. assets. Between 70 and 80 per cent of the U.S. economy's borrowing requirement is being met by foreign, mainly Asian, central banks, Harvard professor Niall Ferguson wrote in the New York Times earlier this year.

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