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.