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Asia could benefit as sovereign funds shun dollar
The trouble at US mortgage giants Fannie Mae and Freddie Mac may discourage state-run investment funds from buying dollar-denominated assets but the euro is not likely to be the main beneficiary.
- Reuters
- Published: 23:05 July 19, 2008
New York: The trouble at US mortgage giants Fannie Mae and Freddie Mac may discourage state-run investment funds from buying dollar-denominated assets but the euro is not likely to be the main beneficiary.
Instead sovereign wealth funds, controlling over $3 trillion in assets, are likely to turn to investments in Asia, a move likely to push the dollar lower against Asian currencies including the Japanese yen.
"This is not a euro-dollar story. It's going to be a developed world versus developing world story," said Stephen Jen, who heads Morgan Stanley's global FX strategy.
Authorities in Kuwait this week said the state's sovereign wealth fund, which manages its massive petro-dollar assets, will not buy future Fannie or Freddie debt, opting instead to boost investments in stocks, bonds, and real estate in China, India and Japan.
A Chinese think-tank also said the travails at the two US government-sponsored enterprises add urgency to China's goal of diversifying its $1.8 trillion stockpile of currency reserves.
At the end of 2007, the China Investment Corporation, China's state-run fund, was thought to oversee assets worth about $200 billion, while the Kuwait Investment Authority has up to $250 billion, according to estimates by JPMorgan.
Fannie-Freddie crisis
The US Treasury and Federal Reserve announced a plan last weekend to shore up the balance sheets of Fannie Mae and Freddie Mac, which own or guarantee $5 trillion in debt, close to half the value of all US mortgages.
So far, the plan has helped to shore up investor confidence, and recent Federal Reserve data showed central banks were still adding to their agency holdings in the week to July 16.
But sovereign wealth funds have more flexibility to invest in riskier assets, and a change in asset allocations or future buying habits could be the leading edge of a new downleg for the dollar.
Recent experience with investing in US financial stocks may give fund managers pause.
Since taking a $3 billion stake in US private equity firm Blackstone Group in 2007 and a $5 billion stake in Morgan Stanley this year, China Investment Corporation has taken sizable losses on the value of their investments.
After sinking $5 billion into Merrill Lynch when shares were trading around $48, Singapore's Temasek Holdings has watched Merrill's shares dive to about $30.
"Sovereign wealth funds that invested in US banks have lost 30 to 50 per cent of their investments in the space of six months, so they're becoming more cautious," said Nouriel Roubini, business professor at New York University's Stern School of Business and head of Roubini Global Economics.
In addition, the fear that more mortgage market losses at US banks will force the Federal Reserve to reduce US interest rates again later this year may spell even more trouble for the dollar.
But Ashraf Laidi, chief market strategist at CMC Markets in New York, said the trend away from the dollar will outlive the current US market turmoil.
"It's not only reflective of the negative current in the US economy right now, which will turn around at some point, but is also about the increasing investment opportunities around the world, especially in Asia," he said.
Until now, the dollar's decline has been mostly against the euro and other European currencies. Since the start of 2006, the euro has gained nearly 30 per cent against the dollar.
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