[NYTr] 'Stunning' flight from the dollar led by Japan and China

[All the News That Doesn't Fit]

[And that fool Bush is having a fete for the Dalai Lama. Why not
invite the Falun Gong too, while he's at it? Four more years of Bush,
that's what we need, and the Evil Empire is No More! -NYTr]

The Telegraph - Oct 16, 2007
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/16/bcnchina116.xml

'Stunning' flight from the dollar led by Japan and China

Japan and China Lead Flight from the Dollar

By Ambrose Evans-Pritchard

Japan and China led a record withdrawal of foreign funds from the
United States in August, heightening fears of a fresh slide in the
dollar and a spike in US bond yields.

Data from the US Treasury showed outflows of $163 billion (L80
billion) from all forms of US investments.

"These numbers are absolutely stunning," said Marc Ostwald, an
economist at Insinger de Beaufort.

Asian investors dumped $52 billion worth of US Treasury bonds alone,
led by Japan ($23 billion), China ($14.2 billion), and Taiwan ($5
billion). It is the first time since 1998 that foreigners have, on
balance, sold Treasuries.

Mr Ostwald warned that US bond yields could start to rise again
unless the outflows reverse quickly. "Woe betide US Treasuries if
inflation does not remain benign," he said.

The release comes a day after the International Monetary Fund warned
that the dollar was still overvalued and likely to face "some
depreciation in the medium term."

The dollar's short-lived rally over recent days stopped abruptly
on the data, increasing pressure on US Treasury Secretary Hank
Paulson to shore up Washington's "strong dollar" rhetoric at the
G7 summit this week.

The greenback has already fallen below parity against the Canadian
Loonie for the first time since 1976 and has touched record lows
against a global basket. It closed at $2.032 against the pound.

David Woo, an analyst at Barclays Capital, said Washington was happy
to see the dollar slide. "They don't care so long as the fall is
not disorderly. They see it as a way of correcting the deficit,"
he said.

Mr Woo said a chunk of the August outflows may have come from
foreigners borrowing in the US during the liquidity crunch to meet
needs in euros. "We think it may be a one-off," he said.

The US requires $70 billion a month in capital inflows to cover its
current account deficit, but the key sources of finance are drying
up one by one.

BNP Paribas said America has relied on "hot money" from abroad to
cover 25 to 30 percent of the US short-term credit and commercial
paper market over the last two years.

This flow is now in danger after the seizure in parts of the market
over the summer and after the Federal Reserve's half point rate
cut, which has shaved the US yield advantage over other countries.

Ian Stannard, a Paribas currency analyst, said the data was "extremely
negative" for the dollar. "It exceeds the worst fears. It is not
just foreigners who are selling US assets. Americans are turning
their back as well," he said.

Central banks in Singapore, Korea, Taiwan, and Vietnam have all
begun to cut purchases of US bonds, or signalled an intent to do
so. In effect, they are giving up trying to hold down their currencies
because the policy is starting to set off inflation.

The Treasury data would have been even worse if it had not been for
$60 billion of inflows from hedge funds based in Britain and the
Caymans, which needed to cover US positions at the height of the
credit crunch.