Is The U.S. Dollar Dead In The Long Run?

John Maynard Keynes is infamously quoted: “In the long run, we’re all dead…”. The latest report for U.S. treasury international capital flows reveals a significant drop in foreign demand for Long-Term U.S. securities and makes one wonder if Keynes’ words are not applicable to the U.S. Dollar

In October 2008, foreign investors purchased a net $1.5bn of long-term U.S. securities  vs. $65.4bn in September 2008. With the exception of treasuries which saw net buys of $34.7bn, foreigners dumped long-term securities as follows: -$50.2bn in agencies; -$1.3bn in corporate bonds; and -$6.1bn in equities.

However, a friend in need is a friend indeed and propping up treasuries were our two most loyal and biggest buyers, i.e. China and Japan. China increased $60bn+ @ $652.9bn to surpass Japan for a second consecutive month. Japan increased $12bn @ $585.5bn.

Not surprising, short-term net inflows surged $286.3bn in October 2008. This flight to safety trade induced by market deleveraging explains why T-bill holdings increased @ $150bn.

Foreign investor appetite for U.S. debt is telling two different stories. For the short-term, investors regard the U.S. as a haven of safety while the big picture reveals an emerging trend to back off the long bond.

If forced to bet, the long run and ahead of the investor curve is where investors should prefer to be, because in the long run, the dollar is dead until reincarnated by more common sense fiscal policy.

Related Securities: FXE; UUP; GLD; UDN

Disclosures: U.S. Dollar Bearish Fund (UDN) and Gold Trust (GLD) since 10-29-2008

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