Crescenzi: Dollar Takes a Hit -- But Don't Fret
The U.S. dollar is under pressure Friday, in what is probably a consolidation of the its recent gains (non-commercial traders are record short the euro), although many are citing chatter regarding desires by China and perhaps other foreign central banks to further diversify their reserve assets as a catalyst for today's move.
Concerns about central bank holdings of dollar assets were probably spurred by yesterday's late afternoon release of data on the Federal Reserve's custody holdings of agency securities, on behalf of foreign central banks. The data showed a very large decrease of $10.175 billion to $955.69 billion, the fourth straight decline, an unusual string. Foreign central bank holdings of agencies have now fallen $28 billion from the peak set on July 16.
The dollar's rebound is important for the economic outlook, as it has helped to restore lost purchasing power both by its impact on commodity prices and import prices more broadly.
This week's behavior of agencies and mortgage-backed securities suggest that foreign investors might have returned to the buy dollar fixed-income product, but we won't know for sure until next week's data on custody holdings. It is possible that foreign investors were big sellers of agencies last Thursday and Friday, before the Treasury's announcement, but we can't know because the Fed's data detail only the cumulative activity through this Wednesday -- there's no day-by-day breakdown.
In addition to the focus today on central bank holdings of agencies, there is also focus on a story in the China Daily suggesting that China might cut is dollar holdings (see chinadaily.com).
The notion that foreign central banks want to diversify their assets is hardly news. Central banks have been diversifying their reserve assets for the past six years, reducing their dollar holdings to 63 percent of reserve assets from 70 percent in 2002.
Meanwhile, the euro has ascended to 27 percent of world reserve assets from 20 percent in 2002. There clearly is room for the balance to shift more, say to 60 percent/30 percent and beyond.
In other words, today's chatter is nothing to fret about; and, as I noted many weeks ago, there are a number of factors that are supporting the dollar at present that are likely to last a bit, before giving way to the diversification trade again.
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Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."Crescenzi is a contributor to RealMoney.com."