Saturday, May 12, 2007

What If Foreign Money Shunned the U.S.?

The likely result of a Japanese and Chinese retreat from the Treasury market would be skyrocketing interest rates stateside.

Japanese investors actually rushed out of the dollar once before, in late March, 1987, four months before Alan Greenspan was appointed Fed chairman. At that time, the dollar abruptly fell below the psychologically important 150-yen level for the first time. Japanese investors, who had been assured by the Louvre Accord only a month earlier that the dollar would not fall below 150 yen, panicked and pulled out of the U.S. market. As a result, the yield on benchmark 30-year U.S. Treasuries surged 150 basis points in just six weeks.

This spike in U.S. rates coincided with a plunge in the dollar from 150 yen to 137 yen, offering clear evidence that a move by foreign investors to shun the dollar can have a substantial impact on long-term interest rates in the U.S.

No comments: