Is the USD doomed?

Reserve fear a distraction for dollar watchers

By Mike Dolan
LONDON, June 16 (Reuters) - The raging debate about the future of the U.S. dollar's reserve currency status may be masking the real drivers of its near-term direction.

Even as Russia, China and Brazil ratcheted up rhetoric about a new global reserve currency and diversifying their huge foreign currency stashes away from dollars, the U.S. currency has staged a remarkably healthy rebound this month.

Against the world's most traded currencies, the dollar <.DXY> has clawed back a quarter of the losses it has suffered since March -- losses that were driven by growing confidence in financial and economic recovery.

The billions parked in U.S. money market funds and Treasury securities during the worst of the credit crunch streamed out to seek higher returns in riskier plays such as equity, often outside the United States and significantly in emerging markets.

Fund tracker EPFR estimates that $104 billion has left money market funds since the start of the year and almost $30 billion flowed directly to emerging market equity, mostly since March.
But as the stock market rally has stalled, or at least taken a breather, the dollar has bounced more three percent.

And this bounce came in the face of persistent Russian and Chinese reserve warnings and ahead of Tuesday's summit between these two emerging giants and their new-found economic allies from the BRIC grouping -- Brazil and India.

SMOKE AND MIRRORS
So why has talk of diversification by the world's biggest reserve holders not weakened the dollar further?After all, China and Russia hold more than a third of the $6.7 trillion global reserves stockpile and at least 50-60 percent of their combined holdings is denominated in dollars.

For sure, it was cited as a contributory factor as the dollar skidded through April and May. And data released on Monday showed public and private holdings of Treasuries held by Russian and Chinese names fell by $6 billion in April alone.

But analysts reckon this is small compared with the massive private sector investment swings in and out of the United States in recent months and probably for several months to come.

With equity and bond markets still torn by uncertainty about the next leg of the post-crisis economic story, the dollar's negative correlation with stock market nervousness appears to be re-establishing itself.

As stocks look to lurch lower again, the dollar may well attract another "safety" bid -- just as in the earlier part of the year.Against that, central bank reserve shifts are unlikely to be either sudden or in great size.

For a start, major central banks from Moscow to Beijing or Brasilia would have as much as anyone to lose from any sudden or prolonged loss of confidence in the dollar, given they still hold hundreds of billions in dollar securities. Neither would they want to precipitate a financial crisis that could shock the consumers of one of their biggest export destinations.

Also, whenever the dollar weakens, central banks that fix their currencies at least partly to the dollar are forced to buy at least some dollars to maintain that peg. Periods of dollar weakness are therefore met with official dollar purchases -- even if the proportion is gradually less over time.

Analysts at Goldman Sachs point out that global reserve accumulation, which peaked about $7 trillion last summer, has resumed as the dollar has weakened since March and as crude oil prices surged.

SDR DOUBTS
Others point to the more recent debate about emerging countries switching U.S. Treasury holdings for bonds from the International Monetary Fund -- bonds that would be denominated in the IMF's basket currency, the Special Drawing Right.

However, this flow too may prove more marginal in the short run than it first seems.

Dollars already make up some 40 percent of the SDR basket, limiting the drop in dollar allocations from about 60 percent dollars at present.

As commitments to date from China, Brazil and Russia to the proposed IMF bonds amount to about $70 billion, that would involve a reduction in dollar holdings of $14 billion at most.

The IMF itself is adamant there is no risk the dollar's dominant status for some time.

"The dollar is the principal reserve currency in the global economy and will remain so for as far as we can see," IMF First Deputy Managing Director John Lipsky said on Monday.

So is this is a story for another day?

"The prospects of an aggressive change in the U.S. dollar allocation in the Russian foreign reserves remains very low," Commerzbank analysts told clients on Monday.

"But it is also worth stressing here that the secular move away from the U.S. dollar into other regional bellwether currencies in the emerging markets space is still on, and will probably intensify over the next many years."

Goldman Sachs takes a similar view: "We do believe that the dollar will effectively remain unchallenged as the main reserve currency for a long time but there is also little doubt that the constant reserve diversification talk creates uncertainty."

Beware of falling BRICs

Economist, 18th September 2008.

Emerging countries are not the havens some people thought.

So much for decoupling. In the wake of Lehman Brothers’ failure, emerging markets have suffered one of their biggest sell-offs in years. On September 18th Russia’s main bourses suspended trading in shares and bonds for a third day in a row after the largest one-day stockmarket fall for a decade; the central bank poured billions into big banks and the money market in a forlorn bid to calm fears.

JPMorgan’s emerging-markets bond index fell by more than 5% in the week to September 16th, giving up in a few days all the gains it had made this year. Prices of Argentina’s credit-default swaps, a gauge of credit risk, rose to their highest-ever level. Unexpectedly, the People’s Bank of China cut its benchmark lending rate by 27 basis points on September 15th, to 7.2%, the first cut for six years.

These actions reflected a variety of concerns, such as a darkening economic mood in China and political worries in Russia. But they all have something in common: investors may be changing their minds about emerging markets.

For the past few years, China, Brazil and others, with their high growth rates and large current-account surpluses, began to seem like desirable alternatives to developed markets. For part of last year, the MSCI emerging-markets index was even trading at a higher multiple of earnings than the index of rich-world shares.

That is changing as investors lose their appetite for risk. Merrill Lynch’s most recent survey of fund managers found that they are now holding more bonds than normal for the first time in a decade (indicating a flight to safety). They also have smaller positions in emerging-market equities than at any time since 2001. In the past three months, says Michael Hartnett of Merrill Lynch, emerging-market funds have seen an outflow of $26 billion, compared with an inflow of $100 billion in the previous five years.

Falling oil and commodity prices are partly to blame. When these were rising, money poured into Brazil and Russia, which became targets of the “carry trade” (investors borrow in low-yielding currencies and buy high-yielding ones). Now oil prices are falling (dipping almost to $90 a barrel this week), they are undermining the carry trade and forcing Russia to prop up the rouble. Indebted investors are also being forced by their banks to sell as falling prices reduce the value of their collateral.

Lower oil and commodity prices ought to benefit China and India, by lowering import bills and assuaging worries about inflation. Yet India’s foreign-exchange reserves fell by $6.5 billion in the first week of September as the central bank sold dollars to slow the fall of the rupee. In China, worries are growing about weakening export demand (growth in export volumes has fallen by almost half over the past year to 11%) and falling property prices, which seem to play a role similar to equity prices elsewhere. In the past three months, property sales in big cities were 40-50% lower than a year ago, according to figures tracked by Paul Cavey of Macquarie Securities. An agent for one of Hong Kong’s largest property companies says “confidence ended this week with the fall of Lehman.”

All these countries have the comfort of huge foreign-exchange reserves. On September 16th the new governor of India’s central bank said he would continue to cushion the rupee’s fall; he also raised the interest rate Indian expatriates can earn on deposits at home and let banks borrow a bit more from the central bank. China’s interest-rate cut shows that its government, too, has room for manoeuvre. But the cut will have little direct impact on the economy because lending is limited by quotas.

It was intended to boost confidence at a time of falling share and house prices. Too bad that among emerging-market investors, confidence is in short supply.

Large Issuance Of NZD Bonds Props Kiwi - RBC

[Dow Jones] Chunky NZD-denominated uridashi and eurokiwi issues over past 2 months has helped to remove "an otherwise significant drag on NZD," says RBC Capital Markets senior FX strategist Sue Trinh; notes issuance of these bonds have offset redemptions recently, leading to positive net issuance for 1st time since July 2007.

In January there were NZ$1.7 billion of these bonds issued vs scheduled redemptions NZ$1.3 billion, February issuance so far NZ$1.7 billion vs scheduled redemptions NZ$1.6 billion.


Still more coming in than going out, expect NZD/USD to continue to trade higher ahead of RBNZ Monetary Policy Statement on March 6th.

More Uridashu investment

This could be why the NZD/USD has been so well bid this week:

TOKYO, The European Investment Bank (EIB) will sell a NZ$845 million ($663 million) uridashi bond, documents filed with Japanese financial authorities showed on Thursday.

The bonds will be issued on Feb. 19, with the sales period running from Feb. 8 through Feb. 19. The kiwi bond will have a 7.38 percent coupon and mature on Feb. 22, 2010.

EIB is rated triple A by Moody's Investors Service and Standard & Poor's.

More NZD Investment...NZD415m!!

TOKYO, Jan 17 (Reuters) - The Inter-American Development Bank [IADB.UL] will sell a $17 million uridashi bond, a A$215 million ($189.4 million) uridashi bond, and a NZ$415 million ($319.2 million) uridashi bond, market sources said on Thursday.

The bonds will be issued on Jan. 29.

The U.S. dollar uridashi bond will carry a 2.64 percent coupon, with a maturity date of Jan. 27, 2012.

The Aussie bond will carry a 6.39 percent coupon and mature on Jan. 27, 2011. The kiwi bond will have a 7.41 percent coupon and mature on Jan. 29, 2010. The sales period runs from Jan. 18 through 29.

The IADB is rated at Aaa by Moody's Investors Service and AAA by Standard & Poor's.


That's over 1 billion in 2 days!!

Toyota unit to sell NZ$685 mln uridashi bond

TOKYO, Jan 15 Toyota Motor Credit Corp, a unit of Toyota Motor Corp, will sell a NZ$685 million uridashi bond, documents filed with Japanese financial authorities showed on Tuesday.

The bonds, which will be issued on Jan. 29, will carry a 7.64% coupon.
The sales period runs Jan. 16-29, with a maturity date of Jan. 28, 2010.

Toyota Motor Credit is rated triple A by Moody's Investors Service and Standard & Poor's.

Uridashis are foreign bonds sold to Japanese retail investors.


See, they still love us !

Here’s where all the finance company deposits are flying to:

Dutch bank Rabobank Nederland [RABN.UL] said it would nearly double the amount of its Tier 1 perpetual securities issue to NZ$900 million ($643 million) due to strong demand.

It said the margin on the securities had been set at 76 basis points over the one- year swap rate, following a tender among institutional investors last Friday. The issue -- increased from an initial NZ$400 million -- is the largest ever for a non-governmental organisation in the New Zealand market, the company said.

The increase comes amid adverse global credit conditions, which saw New Zealand's Yellow Pages Group scrap a NZ$100 million bond issue earlier in the month.

The strong demand has been partly attributed to nervousness about investing in local finance companies, five of which have shut their doors in the past four weeks as small investors have stopped lending or demanded their money back.

Still in demand

Offshore investors love us… Do you want proof?

Here it is -Offshore holdings of NZ govt debt rose in Aug.

The proportion of non-resident holdings of New Zealand government securities rose to 67.6 percent at the end of August, from 63.4 % a month earlier, the Reserve Bank of New Zealand said. Offshore holdings of bonds increased to 73% from 69.8% while offshore holdings of Treasury bills rose 12.6% from 8%.

And here's another:

EBRD to sell NZ$522 mln Uridashi bond

The European Bank for Reconstruction and Development [DBRD.UL] will sell a NZ$522 million ($369.9 million) Uridashi bond, Daiwa Securities said
The bonds, to be issued on Oct. 3, will carry a 6.85% coupon. The sales period runs from Sept. 21 to Sept. 26, with a maturity date of Sept. 24, 2009. The EBRD is rated triple A by Moody's Investors Service, Standard & Poor's and Fitch.

More Offshore Investment

Offshore investors continue to be attracted to New Zealand. Here’s another investor story:

SYDNEY, Sept 6 (Reuters) - The Nordic Investment Bank (NIB) has priced its NZ400 million ($276 million) 3-year Kauri bond debut, a joint lead said on Thursday. A Kauri bond is a bond sold by a foreign issuer in New Zealand.

NIB is owned by Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway and Sweden. It gives priority to funding investments that boost economic co-operation between these countries.

Hard to see the NZD/USD staying down with money still coming in at this rate. Word on the street is that a large US bank was selling NZDs on behalf of a hedge fund over the last few days. All done now though.

Still see major currencies range-trading as the sub-prime fall out works it’s way through the markets.

NZD should see some support coming through as markets re-focus on the Monetary Policy Statement from the Reserve Bank next week.

Offshore investment continues

SYDNEY, Sept 5 (Reuters) - Queensland Treasury Corporation (QTC) has launched NZ$375 million ($264 million) in 10-year Kauri bonds, its first such issue.

The bond has a maturity of Sept. 18, 2017 and carries a coupon rate of 7.125 percent a year. It was priced to yield 7.18 percent, 97 basis points over the benchmark 2017 New Zealand government bond and 27 basis points under New Zealand dollar swap. The lead managers were ANZ Institutional, Deutsche Bank AG and RBC Capital Markets. QTC is rated triple-A by the main rating agencies.

QTC said the issue was well received, with 77 percent going to offshore investors. This issue brings the total amount of QTC debt on issue to more than A$34 billion. The State funding body has an estimated borrowing program of A$7.6 billion for the 2007-2008 financial year.

New NZD Kauri Bond issue

Who says offshore investment is drying up?

WASHINGTON, Aug 10 (Reuters) - IFC, the private-sector arm of the World Bank, said on Friday it had launched its first-ever New Zealand dollar Kauri bond, issuing a five-year NZ$300 million note to raise funds to support poverty reduction work.

The notes mature on Aug 23, 2012 and carry a coupon of 7.75 percent, paid semi-annually, and were priced to yield 82 basis points over the benchmark New Zealand government bond, IFC said in a statement. A Kauri bond is a New Zealand dollar-denominated bond issued by a foreign issuer. It can be sold to both domestic and international investors.

The issue was joint lead-managed by ANZ Institutional and Bank of New Zealand, and the notes were placed with both local and international banks and find managers, IFC said. The proceeds of the issue were swapped into floating rate dollars and will be used to finance IFC's operations to support and encourage private enterprise in developing countries.