Word: dollarization
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...surprisingly, these huge dollar holdings are a source of considerable anxiety for capital markets. Any hint that Asian countries in general-and China in particular-are going to sell their dollars causes the greenback to sink and sends treasury rates higher. There is evidence that governments are worried about the size of their caches. Foreign holdings of dollar-based assets doubled from $1 trillion to $2 trillion from the end of 2001 through to the spring of 2005, but since have increased less than 10%. China, which must continue to buy dollar assets if it wishes to keep its currency...
...government purchases of treasuries have slowed, private investors have been stepping up to the plate and buying more dollar-based assets. Why? Because they see real value in U.S. stocks and bonds at current exchange rates. This might seem wrongheaded, because there are plenty of reasons to be bearish on the dollar (and on dollar assets like U.S. stocks). The massive U.S. current-account deficit, which consists of the trade deficit and other transfers, shows no signs of disappearing. So investors know that they will have to contend with an increasing supply of dollars for years to come...
...this situation isn't all bad. The dollar is now low enough to make the U.S. a cheap place in which to travel, do business and buy things. Americans visiting Europe or the U.K. know an expensive currency when they see one. New Yorkers returning from London say the prices there look almost the same as in New York, except they are quoted in British pounds, which are now worth more than $2 each. I learned of a delegation of wealthy Chinese entrepreneurs who on a recent visit to America insisted on going to discount malls to buy designer goods...
...weak dollar also makes U.S. asset prices attractive to foreign investors. U.S. interest rates are higher than those in Continental Europe and are much higher than Japanese rates. Similarly, U.S. stocks look better by comparison. Measured in euros or pounds, the S&P 500 index is up less than 50% from its October 2002 lows, while European markets have more than doubled. Plus, Standard and Poor's recently reported that 44.2% of the revenues of companies in the S&P 500 index were generated abroad, up from 32% five years ago. With almost half of their revenues being earned...
...There is some nice language on this topic in the DPIR, but virtually no dollar signs attached to any of it,” said Whelan, garnering applause from the audience. “I am very concerned about Harvard going forward with this project with very rhetorical commitments regarding community benefits...