(1) Given all the reasons for the dollar to decline, who in their right mind is buying the current flow of dollar-denominated securities held overseas needed to finance America's current-account deficit? (2) Given all the reasons for the dollar to decline, why haven't all the private-sector overseas holders of the enormous stock of dollar-denominated assets dumped them yet? Kash provides an answer to question (1): his answer is, "Asian central banks." But the answer to question (2) remains a mystery to me--and to everyone else.
Perhaps the larger question is why has the administration not made any real attempt to forestall the coming dollar dive? There was some speculation that the administration was secretly hoping the weakened dollar would help its account deficit. Yet the largest deficit is in trade with China whose denomination is pegged to the dollar, so no help there. The general thought seems to be that the Asian countries have so much tied up in the dollar that even a slightly weaker dollar is better than a more volatile alternative. Yet the Financial Times is reporting continued talk by Asian banks considering trading in dollars for Euros or Sterling.
The dollar rebounded a bit today, so talk of a crashing dollar may be premature. Yet until the administration starts working on paring down the deficits, investors will continue to shy away from the dollar. Given the President's stated goals for Social Security and the creative accounting they are going to use to achieve their ends, its doubtful there will much of a rally.
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