Italy’s bank dumped billions $s of Treasury bonds ahead of dollar slide

[powayseller]

Italy’s central bank has switched a quarter of its foreign currency reserves into sterling, dumping billions in US Treasury bonds, in the most dramatic move to date by a G7 country to slash exposure to the dollar.

“Italy’s huge purchase of pounds is the latest vote of confidence in Britain’s economic management, a sign that sterling is regaining its historic role as a benchmark of stability, even if it is too small a player to serve as the anchor of the global system.

An Italian official said the Banca d’Italia was taking action in advance of a dollar slide, widely expected as the US interest rate cycle peaks this summer and investors focus once again on the US’s $800bn (£425bn) current account deficit.

The Banca d’Italia is viewed as one of the world’s most market-savvy central banks, holding onto every ounce of its gold reserves when others, including the Bank of England, under Treasury orders, sold much of their bullion at the bottom of the market.

Tony Norfield, chief currency analyst at ABN Amro, said it was likely that other euro-zone banks were also selling dollars, although most of the rest do not reveal the exact breakdown of their foreign currency holdings.

Mr Norfield said: “The Italians have been quite sneaky, but I wouldn’t be surprised if others are doing the same thing. The Bank of France is worth watching.”

Dollar flight has been gathering pace at smaller central banks. In Sweden the Riksbank announced in April that it had cut its dollar holdings from 37pc to 20pc, while the United Arab Emirates and the gas sheikhdom of Qatar have both signalled plans to move into euros.

The Swiss National Bank switched 10pc of its holdings into pounds in 2004, and Russia is now following suit.

However, for China and Japan, the two giants, with combined reserves of some $1,800bn, it is much harder to diversify smoothly out of the dollar.

Any sign that they are liquidating their holdings of US bonds could trigger a global stampede, causing a dollar crash and a broader financial crisis. The two countries would be left with sharply devalued holdings.

The International Monetary Fund said the UK pound had overtaken the yen to become the world’s third biggest reserves currency, after the dollar and the euro.

Known global reserves of pounds have risen from £55bn to £111.5bn over two years.” – Telegraph.co.uk

[Daniel]

That’s very, very interesting. I would say that the UK economy has some of the same issues facing the US economy (housing bubble, trade deficit). Their housing bubble is just as bad if not worse than ours; their deficit is much smaller, though. I can’t quite see why the Bank of Italy would pick the sterling (over the yen or the swiss franc, let’s say).

Speaking of UK, I should probably bring into discussion that the true RE “canary in the coal mine” is not San Diego, but London (and also Sydney, down under). The RE cycle in the national US market is about one year behind SD, and two years behind London. London last year was exactly like San Diego now: pretty slow. But this year it surprised most analysts by going even further ahead. “Dead cat bounce?” I guess we’ll see. The Bank of England just started raising rates (again), and their governor has been much more vocal against the property bubble than our Fed.

[PerryChase]

Daniel, I would agree with you that London is the canary.
Why do you think that our Fed will pause since our deficit is so much bigger than the Brits’?

Real Estate in Germany has been flat. Do you think that there’s potential there? How about a castle in Bavaria?

Did you read about the Da Vinci Code castle and other real estate investments by American realtor mogul Olivia Hsu-Decker? She made her money selling houses in NoCal and parlayed that into castles in France.

[zk]

“Any sign that (China and Japan) are liquidating their holdings of US bonds could trigger a global stampede, causing a dollar crash and a broader financial crisis.”

This, of course, is pretty much common knowledge. Does anybody know whether there’s a consensus on what the odds are of that happening in, say, the next 10 years? Does anybody know if there’s a better place to keep a finger on the pulse of that situation than the news? Does anybody know what sorts of things would be considered precursors to such an Asian selloff?

I check news.google.com business section every day, and that seems to keep me pretty up to date on newsworthy things financial. If anybody has a better idea than that, I’m all ears.

[powayseller]

I was also wondering why they picked the pound over the Swiss franc or Canadian dollar. England has a voracious consumer society too. I personally don’t have that same confidence in the pound.

I certainly didn’t mean to imply that the Bank of Italy knows what they are doing. History is full of poor choices made by governments.

But we should all be asking ourselves: if we are 100% in US dollars, what is our reason? Anyone who is holding only US dollars should have a list of reasons at the very least. I personally am investigating my options to diversify. Look at it this way: if you lived in Canada or France, you wouldn’t hold any dollar either. By owning only dollars and no Canadian dollars, are you doing this because you think that Canadian dollars are not as valued, or are you merely succumbing to convenience?

These are the reasons to hold dollars:
convenience, dollar will keep its value, foreigners will want to keep funding our trade and budget deficit, foreigners will keep buying our US Treasuries at the current rate, our economy will turn around and interest rates will stay high to entice foreigners to buy our debt. Any other reasons? How reasonable are these reasons anyway?

I am *not* giving investment advice, just asking people to question their cash holdings, and encouraging you all to have a good reason for each investment you hold. You ought to be able to write on a piece of paper at least 3 good reasons for each stock or cash position you hold.

I had a fun time recently looking through my folders, and finding my list of 3 reasons for each of my stock purchases in 1999. For example, I chose UPS because of rising business due to the internet growing, their share price was temporarily depressed due to a one-time tax charge (got this by studying their financial statements)and would go up the next year, and so on. I chose Lands’ End because of their best catalog marketing strategy, high quality of clothing, booming corporate clothing line, etc. They were later bought out by Sears. Both were winners. OTOH, I bought Lucent and Sanmina SCI because my friends had made a lot of money in it and both had just gone through huge price drops; I thought they were a good buy at those low prices. I had not studied either one, and had no good reason for owning either one. I lost most of my money on both. Thank goodness I knew they were gambles and only lost $2K on the internet stocks.

So, have a list of 3 reasons for each position that you hold. These reasons should pass the spouse test. If you can’t convince your spouse with that list, the list isn’t solid enough. This list-idea is from Peter Lynch.

[Daniel]

Powayseller,

We should mostly hold dollars because we live in the US. It’s as simple as that. Our future goods and services will be paid for in dollars, so this is the natural currency to hold for US residents.

That being said, it is good to be diversified for investment purposes, especially in uncertain times. I’m 75% in dollars, and feel comfortable that way.

[PerryChase]

I think that China is now where Malaysia, Thailand and South Korea were in 1997. At that time, they were mainly export economies. They had a big crash but since they they have reformed and have been able to engineer a boom in local consumer spending (with easy credit). That lifted people’s living standards and make them less dependent on exports.

When China builds it middle class and gets to a critical mass when their own consumers can consume their own products, then they won’t need to lend us money so we can buy their exports. I already see that in the cities. China is focused like a laser beam on economic development. We are focused on terrorism and gay marriage. We’d better prepare now for when credit from China is not so plentiful.
Having said that, I feel that we still have about 10 years adjust.

Japan is a little different. When China becomes their biggest trading partner, they’ll need to invest even more in China. I beleive that notwithstanding the political animosities, Japan, Taiwan, South Korean and China’s economies will eventually become inextricably linked (like the EU).

[Daniel]

PerryChase asked…

“Daniel, I would agree with you that London is the canary.
Why do you think that our Fed will pause since our deficit is so much bigger than the Brits’?”

I think the Fed feels that the economy is going under. I don’t think we’ll have an inflation problem, I think we’ll have a recession problem. In every past cycle, the Fed stopped a few months BEFORE the CPI peaked. The recession hit soon afterwards. It is often said that they drive by looking in the rearview mirror, but I would give them more credit. They have a decent idea of what’s coming down the pike.

[Author]

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