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European Debt And The US Dollar: When American Investors Take Their Money Home

Currency structures are wobbling perilously as U.S. investors unload foreign holdings. The recent dramatic reversal of flows in the capital markets could bring the global economy to a screeching halt.

Frank Stocker

BERLIN - Okay, so a vacation in the States costs more now. Maybe gas too. But for the German (and European) economy as a whole, a lower rate for the euro comes at the right time. It went down to $1.31 at the start of this week.

Last Friday, the euro traded at $1.34, while four weeks ago the exchange rate was $1.45 to the euro. So the European common currency experienced a relatively significant loss in a short time frame, which meant that German exports got 10% cheaper – which in turn meant more orders and greater profits. And that's good not only for companies but their employees and their investors. Or so you would think.

Unfortunately, it's not as simple as that. Because underlying the developments on the currency market are gigantic changes in global capital flows. For investors and users, this has so far only been perceptible in the euro's exchange rate trickling lower. However, just as in nature, a stream like that can very quickly swell into river currents that can pull the world economy down in a whirlpool. And that would be a disaster for companies, their employees, and their investors.

Finance markets move billions around the world daily. Sometimes trends go one way, sometimes the other. During the last two years, the word was to invest outside the United States since the government was piling up debts and the Federal Reserve was printing money like crazy. This undermined trust. "The euro was sort of an ‘anti-dollar,"" said Hans Redeker of Morgan Stanley, an investment bank.

Investors brought their money to Europe, preferably Germany. But the mood has turned these past couple of weeks. One reason for that are the interminable debt crises in Europe. But they alone wouldn't be enough to account for the switch, since they already existed. The difference is that now the whole world economy is wobbly. And when this happens, US investors take their money home.

They sold their German stocks, which caused the German stock market index (Dax) to fall in August. America's investors made particularly high profits on those sales; and then little by little went on to sell other investments.

Asian stock markets falling

Recently, for example, stocks from Indonesia and Thailand were involved. They had been holding up well for a while. In the last four weeks, during which time the Dax was more or less stable, the stock markets in Jakarta and Bangkok fell by some 20%.

It's been like that for weeks, one stock market after the other falling because US investors are selling, and taking their money home. The sums involved are gigantic. In the last week of September alone, as figures from Emerging Portfolio Fund Research (EPFR) show, some $3 billion were withdrawn from funds that invest in emerging nation stocks. That is the highest amount ever recorded. Funds that invest in bonds issued by these states sold for a further $3 billion – that's $6 billion in a week. And the selling wave continues.

But where's the money going? EPFR data again helps tell the story. At the end of September, funds that invest in US bonds were experiencing the highest inflow of money ever recorded – and that included a 54-week high for American municipal bonds. The Americans are putting their money into their own bonds because they perceive these to be the only safe port in the present storm.

This in turn has sent the dollar rate climbing dramatically for weeks – and euro rates (along with those of a lot of other currencies) falling in relation to the dollar. The Russian ruble fell by more than 10%, the South African rand by about 15%, the Brazilian real by as much as 20% –all in the space of just four weeks. The only currency that can withstand the trend presently is the Japanese yen.

The reason for that is that Japan has a relatively broad base of domestic investors and isn't as dependent on dollar investors. The picture is very different indeed for the emerging countries, who have been particularly hard hit by recent developments in the capital markets.

Credit could dry up again

As understandable as this development is from the viewpoint of US investors, the herd driving everything collectively in one direction risks trampling on some valuable "assets' in the way the world economy functions. A few months ago, an International Monetary Fund (IMF) study showed that capital from abroad to the emerging nations led banks to loan more money and thus promoted growth. At the time, the focal point of attention with regard to the huge capital flows was not overheating the economic situation or firing up inflation.

And now things are moving in the other direction. The threat now is that abrupt removal of capital will make credit dry up, which would stall growth in the emerging countries. And yet the economic situation in these countries is the last hope for the stumbling economy of the industrial nations. If growth in the emerging countries were to grind to a halt, it would lead to even stronger capital flows away from those countries and the rate of the dollar would go up yet more. A vicious circle would ensue.

The only country that is markedly less susceptible to these flows is China. Beijing can order its banks to extend credit – or not. So from that standpoint, China's economy is not under threat. The danger comes from elsewhere: over the past few weeks, the strong dollar has impacted the exchange rate of the Chinese yuan.

For years, the Americans have been complaining that China has been undervaluing its currency. However, these past two years the Chinese have let the value of the yuan grow slowly -- in the last 12 months alone, by about 7%. However, the renewed strength of the dollar has brought this development to a standstill.

The U.S. Senate has voted to begin debate on a bill that could place trade restrictions on China, and Beijing reacted harshly, accusing the United States of risking a trade war.

And if credits dry up or a new trade war sets off, the world economy could slide definitively into another recession. It is the billions that big American investors are moving around that has set up the current situation, and it is up to those same investors to prevent it from spiraling out of control.

At the end of last week it looked as if perhaps they were starting to see sense. The euro exchange stabilized again. The latest figures from the EPFR showed that "only" $4.8 billion had been removed from the emerging countries, somewhat less than the preceding week.

But that doesn't mean that the trend has been reversed. So during the next few weeks, German investors would be better off staying on the sidelines and avoiding investment – stocks or bonds -- in emerging countries. Because they'll be crushed by herds of big investors if there's another stampede.

Read the original article in German

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FOCUS: Russia-Ukraine War

Along The "New Border" Of Ukraine, Annexation Has Just Doubled The Danger

Vladimir Putin announced the annexation of Ukrainian territories in a ceremony in the Kremlin. In a village just a few kilometers away from what is now the Ukraine-Russia "border" in Putin's eyes, life continues amid constant shelling and the fear of what comes next.

Ukrainian soldiers are stationed in the village of Inhulka, near Kherson.

Stefan Schocher

INHULKA — The trail leads over a gravel road, a rickety pontoon bridge past a checkpoint. Here in the remote village of Inhulka near Kherson in southern Ukraine, soldiers sit in front of the village shop. Inside, two women run back and forth behind the counter, making coffee, selling sausages, weighing tomatoes. "Natalochka, where are the cookies," calls a dark-haired lady across the room.

But Natalochka, her colleague, is about to lose her nerve. "What kind of life is that?" she says, finally reaching up to grab the cookies from the top of a shelf. What kind of life can it be, she asks, when something is constantly exploding next to you and you don't know if you'll wake up in the morning.

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Inhulka is the center of a rural community. 1,587 inhabitants, as the village chief says, one school, one kindergarten, one doctor, two stores. Since March, nothing here is as it used to be. That was when the Russian army came to the village.

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Central to the tragic absurdity of this war is the question of language. Vladimir Putin has repeated that protecting ethnic Russians and the Russian-speaking populations of Ukraine was a driving motivation for his invasion.

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