Dollar Pullbacks Shallow

The dollar remains mostly firmer and the better tone in recent days continues. It is not just that US rates are rising, but also that German rates are slipping as tensions remain acute in the peripheral despite successful Greek bill auction and better performance in the Irish banking sector today.

The Federal Reserve’s QEII is going to face criticism at the G20 meeting that begins Wednesday night in South Korea. However, the demand by Russian President Medvedev that he will insist that the Fed consults other countries ahead of major policy decisions is a non-starter.

The idea that the US is exporting prodigious amounts of capital is simply mistaken. The mirror image of the US current account deficit is that it is a net importer of capital. The most recent TIC data covers the period through August and US investor purchases of foreign bonds and stocks was in the most recent 3 month period was $10 bln. Foreign investors bought about $235 bln of US assets in the same time. For the same year ago period, the US investors bought $64 bln of foreign bonds and stocks.

China’s tightening of its management of foreign exchange quotas and new rules regulating special purpose vehicles and equity investment by foreign corporations will likely force banks to hold more foreign exchange and thereby some of the sources of short-term capital flows (hot money). Meanwhile, ahead of the inflation (due Thurs in China), which is expected to rise to 4% from 3.6%, the PBOC let the yield on the 1-year benchmark bill rise (5 bp) for the second time in three weeks (20 bp on Oct 26). There is speculation China may raise rates again or hike reserve requirements. The central bank of what could be the world’s second largest economy will not consult with others in determining the appropriate monetary policy.