Foreigners Dumped U.S. Assets in August

Foreign investors fled from U.S. assets in August as a meltdown in the U.S. subprime mortgage market triggered a global credit crunch, Treasury Department data showed on Tuesday.

Foreigners dumped a net $163 billion of U.S. securities in August, a record outflow.

Net sales of long-term securities such as bonds, notes and equities -- a more closely watched gauge of foreign demand -- hit $69.3 billion, also a record. The last time this measure turned negative was in August 1998, the month when Russia defaulted on its sovereign debt, sparking a global crisis.

Economists had expected net foreign purchases of long-term securities of $60 billion, according to a Reuters poll.

"Investors seem to be moving money outside of the U.S., which leads us to believe they are planning for a continual U.S. dollar decline," said Mark Meadows, currency strategist at Tempus Consulting in Washington.

"What they are saying," he added, "is they are not going to receive as much in return as it will cost them to hold dollars."

The net sales of $163 billion, which includes short-term securities such as Treasury bills, beat a prior record outflow of $42.3 billion in March 2001.

U.S. capital markets would have needed to attract nearly $58 billion of inflows in order to cover the August trade deficit.

"The diminished foreign appetite for long-term U.S. financial assets is alarming, and will weigh heavily on the dollar," said Tu Packard, chief economist at Moody's in West Chester, Penn.

Credit began drying up across global markets in August as losses mounted on bonds backed by risky U.S. mortgage debt.

The dollar fell sharply during that time. The dollar index, which measure the greenback against a basket of six major currencies, has slipped some 6 percent since mid-August, at one point touching an all-time low. The euro hit a record high against the U.S. currency.

Official Treasury Selling Hits Record

Official foreign buyers such as central banks sharply increased sales of Treasury bonds, unloading a record net $29.7 billion in August. They sold a net $6.9 billion in July.

Japan and China, the top two holders of U.S. Treasury debt, were both sellers in August. By month-end, Japan held $585.6 billion, down from $610.4 billion in July. China cut holdings to $400.2 billion in August from $409 billion in July.

But Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Conn., said this likely reflected a "portfolio reallocation" toward shorter-dated securities.

Foreigners did buy a net $21 billion of short-term U.S. Treasury bills, and Ruskin said that probably helped the dollar from declining even more in August.

Including private foreign accounts, the data showed net sales of Treasuries of $2.59 billion, less than the $9.37 billion of net sales seen in July.

But Ruskin said the data still suggests "considerable dollar vulnerability," especially when short-term dollar financing demands taper off.

U.S. entities, meanwhile, bought a net $21.6 billion of foreign bonds and a net $12.8 billion of foreign equities, showing what Ruskin called "ongoing diversification abroad."

International investors also sold a net $1.2 billion in U.S. corporate bonds in August and a net $40.64 billion in U.S. equities, a sharp reversal from net purchases of $21.2 billion the prior month.