Lower Dollar to Sell More Treasuries?

Is that what Geithner and Bernanke have been doing?

Treasury Secretary Timmy Geithner periodically espouses his "support" for stronger dollar, no matter how he may get ridiculed. Fed Chairman Ben Bernanke recently said he was "watching the dollar drop closely". He may have meant that he was watching the dollar closely to make sure it weakens in an orderly manner, but it was generally interpreted as he is concerned about weak dollar. Even the spendthrift president of the U.S. chimed in, saying he was concerned about the growing government debt.

Weak dollar means stronger Euro, yen, yuan, ruble, real, etc. Foreigners who holds U.S. dollar-denominated assets (majority of them in the form of Treasury notes and bonds) doesn't like to see their assets decline in value as the dollar tumbles. So what do they do, other than protest to Geithner and Obama when they have a chance?

They buy U.S. Treasuries.

According to the Treasury Department's Treasury International Capital (TIC) data released on November 17, foreigners (including foreign central banks) increased their holdings of U.S. Treasuries in September. Treasury auctions of all durations continue to enjoy decent bid to cover ratios, and the rates are getting lower.

In September, total foreign Treasury holdings increased from $3,452.9 billion in August to $3,497.3 billion. It is a fifth-consecutive increase since April this year, coinciding with the stock market turnaround. Year over year, it marks 25% increase. Foreign central banks hold $2,369.5 billion Treasury bills, notes and bonds, or 68.6% of the total foreign holdings.

Foreigners, governments and private entities alike, are defending the dollar by buying up the Treasuries.

So, Geithner, Bernanke, and Obama don't need to do a thing. They can just sit pretty, occasionally express their verbal support for a stronger dollar to placate the foreign creditors, and simply let the dollar slide gradually. As long as the slide is gradual, they can rope in more and more buyers who hope to arrest the decline of their asset value by buying up Treasuries.

Some might say they can't do a thing. If the dollar strengthens too much or too rapidly, that would jeopadize the dollar carry trade, particularly the one engaged by the foreign governments (issuance of U.S. dollar-denominated bonds; here's a post from October, by The Debts of a Nation blog).

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US Dollar Under the Bus

While I was trying to recuperate from a flu over the weekend, Nancy Pelosi did a sneak attack and passed her monstrosity known as "Affordable Health Care for America Act of 2009", or H.R. 3962 (in my mind, the health care deform) on Saturday night. (I'm sure it's a bargain for $30,000 per uninsured person.) Then, as if to prevent the stock market from tanking on Monday (Pelosi's deform will cost fortune for the rest of us; she doesn't care, she's one of multi-millionaires in Congress), G20 pledged to keep stimulus in place to prop up the global economy.

As the result, U.S. dollar was thrown under the bus. Oh for the good of the world, no doubt. Dollar carry trades in various forms (such as issuing U.S. dollar-denominated sovereign debt, for example) just got started.


The next support comes around 72 on the U.S. dollar index (DXY), which tracks a basket of currencies (Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, Swiss Franc) against the dollar. The last time the dollar index was in the 72 range was March - July 2008. Below that level, the currency will boldly go where no one has gone before. The area around 72 is the multi-decade low. (Remember this chart?)

The U.S. stock market cheers. Dow Jones Industrial Average is up 151 to 10,175, S&P500 up 16 to 1,086, Nasdaq up 30 to 2,143 as of 12:09 EST. What will Little Timmy and Big Ben do next?

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