Dollar under attack:

Foreigners Have Stopped Accumulating US Debt Securities

 

It's not a question of when foreigners will ratchet down their US debt purchases.  They are now net sellers.  

 

The question is How long can the Fed continue to "Wind Down" QE in the face of this.  When they change course what will happen to their Credibility?

I watch foreign investment in US securities closely, because small shifts are big enough to affect other US markets. In the last 12 months, foreigners have sold Treasuries at an unprecedented rate.

I include the US’s current account above because historically, countries that sell goods to America invest their dollar proceeds in Treasuries. China, for example, sends goods to the US, and the US pays for them with dollars. China then takes those dollars and buys Treasuries. That’s why foreign investment in Treasuries tends to closely follow the US trade deficit. Fracking has allowed the US to produce more energy domestically, helping to improve its trade deficit.

But foreigners are free to do what they want with their dollars. And recently, they’ve been doing anything but buying Treasuries—like buying American companies and Midwest farmland. It’s risky to have so many dollars and dollar-denominated assets in foreign hands, outside of US control.

Other indicators confirm that foreigners are selling US debt. The Fed holds Treasuries in custody for foreign central banks, and its custody holdings recently plummeted by a disastrous $100 billion in just one week.

Announcements of sanctions against Russia seem to have precipitated that fire sale. Russia itself has decreased its holdings of US Treasuries from $165 billion to $126 billion.
Why should Putin loan the US money when the US is sanctioning Russia’s use of dollars?

Again, since foreigners aren’t buying US government debt, the Fed will have to. That, in turn, increases the quantity of dollars, diluting the value of Treasuries those foreigners already own. Which eventually will induce foreigners to sell even more of their Treasuries, depressing the dollar’s value further.

It’s a risky game, and a potential vicious cycle.