- The dollar fell to a record low against the euro yesterday
as data showing sharply weaker capital flows prompted news fears over the
funding of the US current account deficit.
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- Treasury figures showed net capital inflows into the
US fell from $50bn in August to $4.2bn in September, the lowest since the
near collapse and bailout of the Long Term Capital Management hedge fund
rattled markets in 1998.
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- The euro rose two cents to $1.1953 against the dollar,
beating its previous high of $1.1933, set in May.
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- The data raised fears that the US may have difficulties
funding its current account deficit, which ran at about $45bn a month in
the first half of the year.
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- "The September data is the strongest evidence to
date that the record current US account deficit has become too large to
finance through the net foreign investment into US securities, and is thus
contributing to the long-term decline in the US dollar," said Michael
Woolfolk, senior currency strategist at the Bank of New York.
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- Fears of a trade war involving the US also put the dollar
under pressure after the US Commerce Department said it was planning quota
restrictions on Chinese clothing imports.
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- The news follows a dispute with Europe and Japan over
steel tariffs that could escalate into a bigger trade war.
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- Tony Norfield, head of currency strategy at ABN Amro,
said: "This raises overseas concerns over just how far the US will
go in appeasing various domestic lobby groups, it makes investing in the
US just a little more risky."
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- Economists said America's use of selective trade restrictions
also implied exporters were struggling with the strong dollar and that
a weaker currency was needed to sustain the US economic recovery.
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- There were also fears that China might retaliate by selling
some of its massive Treasury holdings, a move that would hurt the US Bond
market and would likely weaken the dollar further.
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- The report showed the fall in net flows came from declines
across numerous types of US financial assets. Foreign purchases of Treasuries
have fallen to their lowest, on a monthly basis, since February, according
to Lehman Brothers. The Treasury report said foreigners bought a net $5.6bn
of Treasuries in September, down from $25.1bn in August.
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- Foreigners engaged in net selling of "agency"
debt sold by quasi-governmental agencies Freddie Mac and Fannie Mae for
the first time since October 1998, getting rid of a net $3.2bn after buying
$8.9bn the previous month.
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- The lack of interest in bonds was not replaced by the
buying of equities. Foreigners have sold about $6.3bn of equities but Japanese
buying of assets remain particularly strong, with about net $20bn of debt
and equity purchases.
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- Economists noted that the bulk of selling came from private
accounts and hedge funds, not central banks. Private foreign accounts sold
$2bn of Treasuries in September and $6bn of agency debt. Central banks,
which hold large foreign reserves, continue to favor US bonds.
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