“Reverse diversification” boosted global demand for long-term U.S. financial assets to a record as the European fiscal crisis may be beginning to translate into increased demand for dollar assets.Purchases of equities, notes and bonds totaled $140.5 billion in March, more than double economists’ projections, after net buying of $47.1 billion in February, the Treasury Department said yesterday. Treasury purchases rose by the most since June as China, the largest lender to the U.S., added to its holdings for the first time since September.
“Diversification was a major deadweight on the dollar last year and reverse diversification is now a major source of vulnerability for the euro,” said Alan Ruskin, head of foreign- exchange strategy at Royal Bank of Scotland Group Plc in Stamford, Connecticut. The crisis may result in 2 percentage points of “growth divergence in the U.S.’s favor,” he said in a telephone interview yesterday.
Signs of a sustained economic recovery, including a rebound in earnings and stock prices, may increase demand for U.S. investments as concerns mount about the sustainability of government debt in Europe. The world’s largest economy has expanded for three consecutive quarters and added 573,000 jobs in the first four months of the year. Russia cut the share of euros in its international currency reserves to 43.8 percent at the end of 2009 from 47.5 percent a year earlier, Interfax reported yesterday, citing central bank data.
‘Fear Was Misplaced’
The dollar has strengthened 7.2 percent so far this year while the euro has slumped 8.7 percent, according to Bloomberg Correlation-Weighted Indices. The euro dropped to $1.2235 yesterday, the lowest level since April 2006.
The Standard & Poor’s 500 Index in March rose 5.9 percent, its biggest gain since July 2009, while the Dollar Index, a gauge of the U.S. currency’s strength against six other major currencies, gained 0.9 percent. Treasuries declined 0.9 percent in March, according to an index compiled by Bank of America Corp.’s Merrill Lynch unit.
“Foreign institutions and individuals are still turning to the U.S. as a safe haven,” said Paul Christopher, senior international investment strategist at Wells Fargo & Co. in St. Louis. “There was some concern foreigners were abandoning the U.S. currency. That fear was misplaced.”
I've covered the market moves extensively in the "yesterday's market" posts. Suffice it to say, US assets are currently a safe haven asset. This has incredibly important implications.
1.) Low interest rates: as traders bid up Treasury bonds, yields drop. This means US borrowing costs -- which could easily get out of hand right now -- are contained (at least for now).
2.) Lower commodity prices: commodities are price in dollars. A stronger dollar means lower commodity costs, which in turn means lower inflationary pressure. This also means the cost of oil will be kept in check, helping US consumers.
3.) Weaker exports. A strong dollar means US exports are now more expensive, lowering the amount of exports foreigners are willing to buy.
