FOREX VIEW: US Equity Investors, The Dollar's New Enemy?

15 December 2004

By Steven Vames

A DOW JONES NEWSWIRES COLUMN

NEW YORK (Dow Jones)--To the dollar's long list of enemies - speculators, terrorism and war risks, budget and current account deficits, the spend-not-save U.S. culture, among others - U.S. equity investors might be joining the ranks.

Though scary for the dollar nonetheless, most of Treasury's international capital system flows data merely confirmed the well-advertised fact that foreign purchases of fixed income remain well below levels from earlier in the year and that foreigners still aren't very enthused by the U.S. stock market.

But what was new and unexpected was that U.S. investors bought a stunning $12 billion in foreign equities, up from a net sale of $1.3 billion in September and the highest since January. U.S. investors also bought $3.2 billion in foreign fixed-income, from a net sale of $1.4 billion in September.

Though one month doesn't a decisive trend make, the data could signal that as a falling dollar started to make front-page news in September and October, equity investors took the cue, sending some investment dollars overseas.

"If this demand were to remain elevated or grow, it would further stack the deck against the dollar, adding to the growing trade and investment income deficits that must be finance by foreign flows,"' said Daniel Katzive, foreign exchange strategist at UBS in Stamford, Conn.

Taken together, U.S. purchases of foreign fixed income and equities in October marked the greatest U.S. appetite for foreign securities in more than four years. It's the first such hint during the current dollar down-cycle that equity investors may be looking to diversify significantly overseas.

Some dismissed the jump as a fluke. "For now, we have to look at the rebound in the U.S. stock market after the election and assume that this was probably related to election uncertainty and will be a one-off," said Kristjan Kasikov, currency strategist at Calyon, a unit of France's Credit Agricole S.A., in London.

Still, the phenomenon struck many analysts as surprising and could represent yet another threat to the dollar at a time when it doesn't have much going for it anyway. Given that U.S. consumers inherently have less buying power abroad now, it suggests they are betting the dollar will weaken further, which will still given them room to gain not just on the investment but on the exchange rate.

The shift in U.S. preferences was skewed toward European equities, which took in $7.2 billion of the outflows and $4.9 billion went to the U.K. as well.

If investors are indeed making decisions, based on the dollar outlook, to put more of their equities holdings overseas, it would in many ways be the inverse of what was seen in the late 1990's and 2000, when foreigners found a strengthening dollar to be a pretty thick icing on the cake of the rising stock indices.

Others say it might be more of a signal that dollar bearishness has gone so mainstream that it's finally reached its last frontier. If that were the case, it might be a sign that the dollar's fall has started to run its course.

"Once the average unsophisticated investor is on board, the trend is so cool that its become uncool," said Josh Levy, managing director of Tactical Asset Management in New York.

(Steven Vames covers foreign exchange for Dow Jones Newswires in New York. He has also covered equities in Los Angeles and the Treasury market and fixed income industry in New York.)

15 December 2004 08:56 pm GMT 637 words
Dow Jones Capital Markets Report English

-Steven Vames; Dow Jones Newswires; 201-938-5063; steven.vames@dowjones.com [ 12-15-04 1556ET ]

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