2nd May 2007

Dollar Doom-mongers

With regard to the $, it has been inevitable that we should see such vulnerability if only because of the size of the US current account deficit – currently that hungry beast requires over $60bn of new capital inflows every month to satiate its hunger. So what are the alternatives? Some would say that the currency may have to fall by over 30% in order to affect the deficit, but maybe we are not taking into account that country’s ability to attract and afford further external capital?

Yes the deficit is high, and significantly higher than earlier days, but we should consider America’s ability to service such debt. In fact this deficit is equal to only 1% of the value of the country’s private assets and thus funding from overseas shouldn’t be such an obstacle.

Foreigners, despite the frantic headlines, still seem keen to hold US investments, with 43.9% ($2,600bn) of the US Treasury market, 33.6% of the corporate debt market ($2,070bn), and 17% of the equity market ($2,600bn) all held by outsiders. This may seem high but in fact compared to other leading industrial nations it is by no means exceptional. For example in the UK 42% of the equity market is foreign owned, and almost 30% of the Japanese market. Indeed, 50% is not uncommon for many emerging markets as foreigners seek to invest in the more exciting growth opportunities.

The point therefore is that there is still more capacity and opportunity for overseas investors to pour their money into the US without the Americans fearing a takeover by outsiders. The question is will they - considering the current rather dismal outlook on the $?

Although the Chinese with their $ reserves of over $1000bn (and still growing at $30m an hour!) seem to have been diversifying some of their cash into other currencies, it is certainly not in China’s interest to cause a currency crisis. The vital symbiotic relationship between these two giants is probably the most crucial economic and political relationship in the world and how they manage their joint economies and their currencies will be key element for us all.

The outlook for the Dollar is in all likelihood still going to be weak, but we should never underestimate that nation’s ability to still attract more assets. The Dollar will probably still retain its position as the natural repository for the world’s savings but at a lower level than before. Whether the Euro can ever gain the credibility to replace it would still seem to be some way off.

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And finally…….I understand that up to 300 racehorses stabled next to the venue in Belgrade for the forthcoming Rolling Stones concert are to be drugged. That should allow them to blend in nicely with the band then.

Have a good week,

Justin Urquhart Stewart
Director
Seven Investment Management