FYI | Apr 11 2007
By Greg Peel
Investment bankers Lehman Bros only started making the calculation in 1995, but back then the US dollar still reigned supreme as the world’s reserve currency and thus the obvious choice as the denomination for government and corporate bond issues across the globe.
Gold bugs will tell you that the US dollar is artificially over-inflated, has been for decades, and is very much due a decline at least to a more realistic level, or, in more radical opinions, is on the road to a complete and total collapse. Whether or not such opinions are justified is neither here nor there when considering the simple reality that the US economy is slowing, and that both emerging market (China) and old-world (Europe) economies are growing to undermine the once exalted status of the US.
Not that that’s at all a bad thing from the point of view of an economically balanced world.
Aside from recent weakness in the US dollar, a newfound confidence in economic growth outside the greenback economy is evident in the fact that, by Lehman Bros calculations, government and corporate bond issues in 2007 in home currencies will total US$4.9 trillion against US$4.8 trillion of US dollar-denominated issues. This is the first time this has occurred in twelve years of records.
Issuance in British pounds, Canadian dollars and Asian (ex-Japan) currencies will likely set new origination records in 2007. These will be driven by global investors seeking higher-yielding investments.
Bloomberg reports Lehman’s Jack Malvey as suggesting there is no distinct shift away from the US dollar to any one particular currency, but rather “globalization trends under way in fixed-income origination suggest a more regionally diversified debt base with deeper local capital markets”. The first quarter saw an 18% increase in foreign issuance over the previous year compared with 10% in US dollar bonds.
Fixed-rate corporate bonds sold in euros jumped 49% in the quarter to US$110 billion, surpassing such debt denominated in US dollars for the first time since the European currency began. Government bonds issued in the Eurozone also outstripped Japanese debt issues for the first time since 2000.
"Depending on the quality composition of issuance and currency fluctuations, even the broadest global debt benchmarks may have a European leaning by the end of this decade," Malvey said.
Meanwhile, US Treasury secretary Henry Paulson and European Central Bank president Jean-Claude Trichet both appear relatively happy with the US dollar decline/euro appreciation to date. In the case of the US, a weaker dollar has served to boost long-suffering American exports and thus provided a buffer against a weaker housing market and weaker corporate spending. In Europe’s case, a stronger euro is assisting in the battle against inflation.
The Chinese, however, are still smarting from US attempts to force their hand on the matter of an undervalued yuan. China declined an invitation to attend a G7 meeting in Washington this weekend.