U.S. Assets Attract Rising Foreign Demand
Foreign demand for long-term U.S. financial assets rose in August even though China trimmed its holdings of Treasury securities.
Foreigners purchased $28.6 billion more in assets than they sold in August, according to Treasury data released Friday. That followed a net increase of $15.3 billion in July, and $90.2 billion in June.
The Treasury Department is auctioning record amounts of debt to cover a deficit estimated to have hit $1.41 trillion for the budget year that ended in September. Some economists worry that if overseas buyers don’t keep buying U.S. debt, interest rates could rise. Inflation eats away at the purchasing power of a currency.
China trimmed its holdings by $3.4 billion to $797.1 billion in August, but still remained the largest foreign holder of Treasury securities.
Japan, the second largest foreign holder, boosted its Treasury securities to $731 billion, from $724.5 billion in July.
The federal budget deficit for 2009, which will be officially released later Friday, is expected to more than triple last year’s record imbalance. The Congressional Budget Office projects that under President Barack Obama’s spending plans, the red ink will total $9.1 trillion over the next decade.
The 2009 deficit ballooned as the government spent massive amounts to stabilize the financial system and jump-start the economy. In addition, revenues plunged as millions of Americans lost their jobs and recession-battered companies paid less in corporate income taxes.
China’s foreign holdings of Treasury securities are a direct result of the huge trade deficits the U.S. runs with China. The Chinese take the dollars Americans pay for Chinese products and invest them in Treasury securities and other dollar-denominated assets.
American manufacturers argue that the huge dollar reserves China is building up reflect a strategy by the Chinese government to keep its currency artificially low against the dollar to gain trade advantages. A weak Chinese currency makes Chinese goods cheaper to American consumers and U.S. products more expensive in China.
However, the administration on Thursday declined to cite China as a currency manipulator in its latest currency report to Congress.
China, alongside several other emerging countries, has been pushing for an alternative to the U.S. dollar as a reserve asset as the emerging Asian power diversifies its holdings. A falling dollar means its reserves are worth less.
Recent figures from the International Monetary Fund showed that the dollar’s share of total reserves has fallen to its lowest level since 1995.
The dollar’s reaction was muted Friday. The 16-nation euro dropped to $1.4880 from $1.4931 late Thursday, while the dollar rose to 91.03 Japanese yen from 90.65 yen. The British pound, meanwhile, gained to $1.6360 from $1.6268.
The Chinese currency is not freely traded. The dollar edged up to 6.8266 yuan from 6.8259 late Thursday, according to Thomson Reuters data.
Treasury also said Friday that Russia boosted its holdings of Treasury securities in August by 3.1 percent to $121.6 billion. The holdings of oil exporting nations were unchanged at $189.2 billion.
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AP Business Writer Tali Arbel in New York contributed to this report.
10/16/2009 10:58 AM MARTIN CRUTSINGER, AP Economics Writer WASHINGTON