James Turk: Hold gold, not the Dow

Section:

By Alison Fitzgerald
Bloomberg News Service
Monday, May 15, 2006

http://quote.bloomberg.com/apps/news?
pid=10000006&sid=a6jopiL.4IYY&refer=home

WASHINGTON -- International investors slowed purchases of U.S.
securities in March as foreign central banks were net sellers of
Treasury notes for the first time in six months.

Net holdings of Treasury notes, corporate bonds, stocks and other
financial assets increased by $69.8 billion, less than February's
revised $90.5 billion, the Treasury Department said in Washington
today. Japanese investors cut their holdings of U.S. debt.

The slower rate of accumulation comes as investors expect the
interest-rate gap between the U.S. and Europe and Japan will shrink,
while central banks diversify reserves. The slide in the dollar this
year may also deter some investors, said currency strategists.

"Foreign investors have less and less interest in U.S. securities,
which is a big problem for the dollar," said Toshi Honda, a currency
strategist in London at Mizuho Corporate Bank. "Today's numbers are
not going to stop the current trend of the declining dollar."

In the last two months, Sweden's Riksbank almost halved its dollar
reserves and banks in Kuwait, Qatar and United Arab Emirates said
they were increasing euro holdings. Russia's finance minister
complained about the dollar's "instability."

The European Central Bank is lifting borrowing costs in response to
faster growth just as the Federal Reserve considers a pause in its
cycle of rate increases. The Bank of Japan said in March it planned
to end five years of interest rates at zero percent. The dollar is
down 6 percent against a basket of currencies this year after
rallying 12.7 percent in 2005.

"March was the best month for the greenback so far in 2006," Sherry
Cooper, chief economist at BMO Nesbitt Burns in Toronto, said before
the report. "The U.S. dollar did not swoon until April."

The overall gain in purchases by foreigners was enough to cover
March's $62 billion U.S. trade deficit and compares with an average
of about $57 billion in the past five years.

The dollar was little changed after the report at $1.2829 per euro
and 110.28 yen. The benchmark 10-year Treasury note was also little
changed, yielding 5.18 percent.

Analysts expected inflows of $79.9 billion, the median of five
analysts surveyed by Bloomberg. International purchases of U.S.
securities peaked at $106.4 billion in October.

Purchases of Treasury securities rose a net $3.07 billion, down from
$21.9 billion in February. Foreign central banks cut their holdings
by $6.3 billion.

Demand for agency debt increased by a net $19 billion.

The U.K., China, and the Organization of Petroleum Exporting
Countries all increased their holdings of Treasury securities in
March, led by a $16.8 billion increase for the U.K. Caribbean
banking centers, which some analysts tie to hedge funds, boosted
their Treasury holdings by $7.3 billion.

The net figure in today's report comprises Treasury notes and bonds;
debt of so-called agencies such as Fannie Mae and Freddie Mac;
corporate bonds and stocks; and the stocks and bonds of foreign
companies bought from U.S. investors. The report is one measure of
U.S. capital flows and doesn't include foreign direct investment and
bank deposits.

Foreigners' holdings of U.S. stocks rose by $19 billion. The
Standard & Poor's 500 rose by less than 1 percent in March and is up
4 percent so far this year.

Corporate bond holdings rose $48.1 billion.

The U.S. economy will grow at a 3.5 percent annual rate from April
through June, according to the median forecast of 81 economists in a
Bloomberg survey.

Economists boosted their median estimate for first quarter growth to
an annual rate of 5.8 percent, from a previously reported 4.8
percent, after the U.S. trade deficit unexpectedly narrowed in March
and exports climbed to a record.

U.S. interest rates are still the highest among the Group of Seven
major industrial countries. The Fed raised its benchmark rate to
4.75 percent in March, then boosted it again to 5 percent last week,
a half-point higher than the Bank of England.

The Bank of Canada's main rate is 4 percent, the European Central
Bank's key rate stands at 2.5 percent and the Bank of Japan's
benchmark is near zero, where it has been since 2001.

The U.S. needs foreign capital to fund its current-account deficit,
the broadest measure of trade because it includes investment income
and transfers. The deficit rose to a record $804.9 billion, or 6.5
percent of GDP, last year, the Commerce department said.

Japan, the largest foreign holder of U.S. government securities,
sold a net $18.2 billion in Treasuries in February and holds a total
of $640.1 billion. China bought a net $1.6 billion in U.S. debt in
March and holds $321.4 billion.

U.K. holdings, which some analysts say include investments from
Middle East oil economies recycled through British banks, rose in
March by $16.8 billion and total $171.5 billion.

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