Foreigners stung by dollar's sag could curb buying of US debt
At the Bonn economic summit in 1985, Rimmer de Bries, a Morgan Guaranty Trust Company economist, recalls telling some Japanese officials: ``Buy our products or lose on your financial investments.'' Japan did not step up the economic pace or loosen trade barriers sufficiently to import many more American goods. So the Japanese - and many other foreign investors - are losing heavily on their dollar investments as the dollar sinks.
Foreigners owned at least $256.3 billion of the national debt in September. With central banks intervening heavily in the foreign-exchange markets recently to prop up the dollar and then probably reinvesting that money in Treasury securities, the total of foreign-held debt may well have reached $300 billion.
How much those investors have lost on paper (or realized if they have sold their Treasury securities) depends on the exchange rate that prevailed when the securities were purchased. If a Japanese investor bought bonds in March 1985, when the dollar was as high as 260 yen per dollar, and sold at the current rate of about 153 yen, he would have lost about 41 percent of his investment.
In some cases, the rise in bond prices in the last year or two may to some degree offset foreign-exchange losses. Further, American securities often yield a higher return than those in West Germany, Japan, and other nations.
Nonetheless, even if the average loss on this Treasury paper amounted to only 10 percent, the loss for foreign investors would be some $30 billion.
``They are suffering,'' says Scott E. Pardee, vice-chairman of Yamaichi International (America) Inc.
Foreign central banks, which hold United States dollars as part of their international monetary reserves, could be facing some bookkeeping losses, too. In recent years, for example, the Bundesbank, West Germany's central bank, made considerable profits on its operations in the foreign-exchange markets as the US dollar strengthened. These helped reduce the government's deficits by billions of marks.
For the past two years of a declining dollar, however, the Bundesbank probably found it harder to make profits. It may even have losses on its balance sheets. But these are not likely to be charged to the government.
In terms of marks, the Bundesbank will already have seen the value of some of its foreign-exchange reserves decline. These reserves exceeded $46 billion in October, perhaps two-thirds held in dollars. Since then, the Bundesbank has been piling up more dollars - a shrinking asset - as it attempted to prevent the mark from rising in value against the French franc.
Last year, based on nine months of data, net foreign investment in the US was running at an annual rate of $119.4 billion, up from $99 billion in all of 1985. Foreigners were adding $69.9 billion of US government securities, $41.7 billion of US corporate bonds, and $24.5 billion of stock. Stock purchases were far above the $5 billion bought in 1985. Rising bond and stock prices offset some foreign-exchange losses. But foreign investors cannot be happy with the devalued dollar.
The Japanese invested more than $100 billion abroad last year, perhaps half in the US. The dollar is down some 6 percent against the yen so far this year. On paper, those investors have lost $3 billion on their American investments.
At this point, with the dollar already weak, foreigners must decide whether or not to put more money into the US. If the dollar does not sink further, paper investments could offer a good return, the experts say. Further, in terms of the mark or yen, American real estate and corporations are now relatively cheap in many cases. If the dollar weakens further, any new investment also gets hit by the foreign-exchange factor.
One test of foreign investors' attitudes could be the Treasury sale of about $30 billion in securities early next month. Observers will be watching to see how much the Japanese and other foreigners buy.
Last week the Japanese showed a strong appetite for investments denominated in European Currency Units, a composite of European currencies. But for heavy savers like the Japanese, it may be difficult to find sufficient good investments outside the US.
The Economic Monitor of Wells Fargo Bank commented: ``Cutbacks by private investors probably will be offset largely by stepped up official investments - a byproduct of central banks' dollar purchases to support the US currency in the foreign exchange markets.''
In the first nine months of last year, foreigners absorbed more than 30 percent of the increase in publicly held Treasury debt. That compares with about 10 percent in 1985.