What Has a Worldwide Slowdown Done to the Currency Markets?
What Has a Worldwide Slowdown Done to the Currency Markets?
The proposal for a new “‘global reserve currency”‘ has received a lot of press lately. But the media seems to be ignoring the impact of the global economic slowdown on overall currency reserves and the resulting impact on the U.S. Ttreasury market.
China and Japan stockpiled huge reserves on the back of the U.S. consumers, who eagerly bought Asian-made goods. But U.S. consumers are cutting back, and global trade has slowed dramatically as a result. Both Japan and China will therefore have smaller trade surpluses in 2009, and less money to invest back into the U.S. Ttreasury market.
Unfortunately, this fall in global reserves coincides with a big increase in funding requirements by the U.S. Treasury. The U.S. government and Federal Reserve have now spent, lent or guaranteed US$12.8 trillion in their attempt to get the U.S. economy back on its feet. Funding requirements for all these stimulus packages means they will have to sell trillions of dollars worth of new Treasuries to cover their expenses.
Even the Fed’s offer to buy US$300 billion of Treasury purchases won’t put much of a dent in that supply.
With fewer buyers chasing more supply, the price of these Treasuries will fall, and rates will rise. Plus, they will need to entice foreign investors into purchasing this new debt, and the sweetener will be a fall of the value of the U.S. dollar.
