Currency markets in the crossfire

Dollar down on Asian selling, but up on European woes..
Which way she goes, no-one knows..

China, Japan Reduced Holdings of U.S. Treasury Debt in January

By Vincent Del Giudice

March 16 (Bloomberg) — China and Japan, the two biggest foreign holders of Treasuries, reduced their positions of U.S. government debt in January as a measure of demand for American financial assets fell to a six-month low.

China remained the biggest owner abroad of Treasuries, even as its holdings dropped by a net $5.8 billion to $889 billion, according to Treasury Department data released yesterday in Washington. Japan cut its holdings in January by $300 million to $765.4 billion, the report showed.

China has been a net seller of Treasuries for three straight months, the longest such stretch since the end of 2007. Chinese officials have questioned the dollar’s role as a reserve currency and recently sought assurances about the safety of U.S. government debt as the budget deficit widens to a projected record $1.6 trillion this year.

“Foreign central banks stopped buying Treasuries in January,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “If this were to continue, if China were to stop recycling its dollars into U.S. Treasuries, it could have dire implications for Main Street America in that mortgage rates could move higher.”

International buying of long-term equities, notes and bonds totaled a net $19.1 billion, compared with net purchases of $63.3 billion in December, the report showed. That was the smallest net gain in purchases since July.

Weaker Than Expected

Economists in a Bloomberg News survey projected long-term U.S. financial assets would show a net increase of $47.5 billion in January, according to the median of four estimates.

The selling by China and Japan may be temporary, as the world’s largest economy rebounds from a recession and as concern lingers about government debt of European Union countries such as Greece, economists said.

In the short haul, there is no need for alarm as portfolio changes often occur at the start of the year,” Rupkey said. “The U.S. will continue to see renewed inflow later this year as its economy remains a relative oasis of calm now that other sovereign credits are experiencing troubles with debt loads.”

Including short-term securities such as stock swaps, total investment flows show foreigners sold a net $33.4 billion after net buying of $53.6 billion the previous month.

Chinese Premier Wen Jiabao this week sought assurances that the U.S. will protect the value of China’s dollar assets.

At a press conference in Beijing marking the end of China’s annual parliamentary meetings two days ago, Wen said dollar volatility is a “big” concern and “I’m still worried” about China’s U.S. currency holdings.

‘Concrete Steps’

Wen urged U.S. officials to “take concrete steps to reassure investors” about the safety of dollar assets, repeating concerns that he expressed a year ago, sparked by a growing U.S. fiscal deficit.

China’s share of U.S. bills, notes and bonds in January amounted to 24 percent of the total $3.7 trillion in Treasuries owned by investors abroad, up from 19 percent three years ago, according to Treasury data.

Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York, said China is selling bills it bought during the financial crisis of 2008 and 2009 and buying longer-term notes and bonds.

China, as well as many other countries, loaded up on the short end during the crisis,” Thin said in an e-mail. “Now that the crisis has eased, these holders are simply letting these short-end holdings mature and then extending out the curve, rather than rolling it back into the short end again.”

Russia’s Exposure

Russia’s Treasury holdings in January fell by a net $17.6 billion to $124.2 billion, the lowest level in a year, the report showed.

The Treasury’s reporting on long-term securities captures international purchases of government notes and bonds, stocks, corporate debt and securities issued by U.S. agencies such as Fannie Mae and Freddie Mac, which buy home mortgages.

Total foreign purchases of Treasury notes and bonds were $61.4 billion in January compared with purchases of $69.9 billion in December.

Foreign demand for U.S. agency debt from companies such as Fannie Mae and Freddie Mac showed net selling of $5 billion in January, the first drop in three months.

Net foreign purchases of equities were $4.3 billion in January after net buying of $20.1 billion in December. Investors sold a net $24.6 billion in U.S. corporate debt in January, the eighth straight month of selling.

The Standard & Poor’s 500 Index in January dropped 3.7 percent, the biggest monthly fall since February 2009. The Dollar Index, a gauge of its strength against six other major currencies, rose 2.1 percent in January. U.S. Treasuries gained 1.58 percent in January, according to an index compiled by Bank of America Corp.’s Merrill Lynch unit.