King Dollar is back on his throne. The US dollar index, which tracks the greenback against six other major currencies, is near its highest level in 20 years. The rise of the safe-haven currency amid higher rates, a European war and global shortages casts a long shadow.
For companies with overseas revenue, the headache is the big hit to profits. The market impact of the $23 billion US Treasury is a real, if less obvious, issue. Against the Japanese yen, the dollar has gained more than 18% since the end of September. The fall of the yen against the dollar may reduce Japanese demand for US government debt.
As the dollar rises, foreign investors have to pay more for currency hedging, reducing their returns. Although the 10-year US Treasury yield briefly hit 2.97% this month, the yield actually drops to just 1.32% once you factor in yen-dollar hedging costs. These now stand at 1.65 percentage points, a two-year high.
Japanese institutions sold $74 billion worth of Treasuries in March, data showed last week. While the Asian country remains the largest foreign holder of US government bonds, its $1.23 billion holding is at its lowest level since January 2020.
The sell-off may have been exacerbated by Japanese fund managers posting profits for the fiscal year, which ends in March. Even so, the fall is 2.5 times larger than the previous largest selloff by Japanese investors in a single month, according to TD Securities.
China, the second largest foreign holder of Treasuries, also reduced its holdings for the fourth consecutive month in March. Since November, it has sold more than $41 billion of US government debt.
Sustained selling would be a problem for the Federal Reserve. The U.S. central bank is counting on foreign investors to help absorb the increased supply of Treasuries coming to market as it winds down its pandemic-era bond-buying program. Fed boss Jay Powell will only have to hope that rising yields and the attractiveness of the dollar as a safe haven will outweigh the higher hedging costs.
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