A Difference of Opinion

Many economists think that a further significant depreciation of the US dollar is likely in the not-too-distant future. Apparently a lot of Europeans disagree. Yesterday’s BEA data on the US’s balance of payments in the third quarter of 2004 highlights the fact that Europeans have continued to buy US dollar assets in amazingly large quantities. Apparently they are not scared off by the prospects of further declines in the dollar’s value.

The table below shows net purchases by Europeans of nearly $150bn in US assets during the third quarter. On the other hand, purchases of dollar assets by people in other parts of the world (with the exception of Canada) has seemed to slow recently, as would be expected if they foresee a drop in the dollar’s value. (Note that the declines in purchases by Japan and the Rest of Asia are dominated by declines in the purchases of dollars by the Chinese and Japanese central banks.)

What explains the anomalous Europeans? I don’t know for sure, though (as usual) I’m willing to offer up a possible explanation. Perhaps Europeans (and Canadians too, for that matter) believe that any further declines in the dollar will come against currencies other than their own. The dollar has indeed fallen considerably against the euro already, and maybe the perception is that it does not have much further to fall. A related story could be that Europeans believe that the ECB won’t let the dollar fall further against the euro.

This doesn’t rule out a belief that the dollar will still decline considerably against yen or yuan, of course. But it’s interesting to see that many Europeans apparently believe that the dollar has sunk against the euro as much as its going to.