Dollar may follow Asian monies' collapse

Dollar may follow Asian monies' collapse

By Yoshiko Mori

TOKYO (Reuters): While the United States economy has little in common with Indonesia's, some analysts say the dollar could come under the same types of pressures that hit the beleaguered rupiah as "borrowed capital" flows back home in a time of growing uncertainty.

Some experts say the dollar's sharp fall on Wednesday shows the long-term vulnerability of the U.S. currency.

"There is a chance that the U.S. currency will follow in the footsteps of emerging market currencies if capital flows to U.S. markets keep dwindling," said Susumu Takahashi, chief economist at the Japan Research Institute.

Tetsuji Sano, senior economist at the Asian Economic Research Group of Nomura Research Institute (NRI), said: "People have always believed that the United States will be immune to the capital exodus that made emerging economies in the region go belly up."

But many are realizing that the U.S. economy's basic structure is quite similar to those of emerging economies that have been overly dependent on foreign capital, he said.

U.S. Treasury Secretary Robert Rubin has named key three elements -- current account deficit, net debtor position, and capital account liberalization -- as factors that make a country vulnerable to contagion from the emerging market crisis.

"The U.S. has all three qualities, but international investors until recently kept investing capital in U.S. markets based on the belief that the key currency status of the U.S. dollar would stay intact," Sano of NRI said.

But capital invested in the United States has begun reversing course, due in part to the growing credibility in markets of Europe's single currency, the euro, and also because of financial sector problems in industrial economies, economists said.

This new competition has been noted by some in Europe as well. Alfons Verplaetse, chairman of the Bank for International Settlements, said in July that "until now, there was no external sanctions to the policies of the United States, even when they forget to do what they have to do. But the competition (with the euro) will be good for them."

He said as part of this, the massive debtor status of the United States will be looked at by markets more closely, which in turn could affect the course of the dollar.

At the end of last year, the United States had net debts of $1.2235 trillion.

"The Asian crisis taught us an important lesson -- any big party financed by other people's money must come to an end when those people find good reasons to leave the party and go home. The United States is no exception," said a Japanese government official speaking on condition he not be identified.

Emerging currencies in Asia have devalued by 35 percent to 70 percent and Sano said a sizable fall could also await the U.S. currency.

But some economists said the magnitude of the dollar's fall might be muted somewhat by the fact that the United States has high-value industries and a government budget surplus. Still the concerns remain.

"The dollar has weakened as the market became more aware of the fragility of the U.S. banking system after the near-collapse of Long-Term Capital Management," Takahashi of Japan Research said.

LTCM had to be bailed out to the tune of $3.6 billion after losing money in speculative investments.

In July, even before the LTCM debacle, foreign holdings of U.S. Treasury securities fell by $10.3 billion, of which the largest drop was $5.7 billion in Britain, where many hedge funds book trades.

Federal Reserve Chairman Alan Greenspan said on Wednesday that sharp swings in world financial markets had left investors with little stomach for risk, raising the threat of a credit crunch that could jeopardize U.S. economic expansion.

"Intensifying risk aversion by global investors is inducing fund repatriation out of the U.S. markets," said Yasushi Okada, chief economist at Credit Suisse First Boston Securities (Japan) Ltd.

In Japan, deepening financial sector woes prompted Japanese financial institutions to withdraw from foreign or reduce operations, including closing overseas branches and selling Treasuries to bolster their capital base at home.

Just on one single day, Sept. 30, when Japanese financial institutions closed their books for the first half, dollar selling amounted to several billion dollars, currency traders said.

Repatriation of funds by Japanese investors, who hold 25 percent of U.S. debt, has just begun, they said.