Foreign Investors Undaunted by Prolonged Dollar Weakness

The sinking U.S. dollar was supposed to scare foreign investors away from U.S. assets. Instead, it may have whetted their appetite for more slices of the American pie.

Foreigners pumped a net $81 billion into U.S. stocks and bonds in November, up from $48.3 billion in October and the most since June, the Treasury Department said in a report Tuesday.

The wave of buying came as the dollar was falling further against the euro and other key currencies. The greenback’s slide sparked widespread hand-wringing that the huge U.S. budget and trade deficits were causing overseas investors to abandon U.S. assets.

Instead, the Treasury’s data suggest that the weaker dollar encouraged foreigners to view American securities as being on sale, some analysts said. As the dollar falls, U.S. assets become cheaper for overseas buyers.

Foreigners’ net purchases of U.S. stocks totaled $14.5 billion in November, the most since May 2001, the Treasury report said.

Net purchases of Treasury bonds by overseas investors rose to $32 billion for the month from $20.8 billion in October. They also snapped up corporate bonds and government agency issues.

The stock purchases, in particular, could be considered a vote of confidence in the U.S. economy, and not simply bargain-hunting, said Drew Matus, a senior economist at brokerage Lehman Bros. in New York.

“It’s a sign that foreign investors expect the economy to be strong going forward,” he said.

But Matus and other experts cautioned against assuming that the November surge in foreign investment could be easily sustained. Global concern over the U.S. budget and trade deficits and the nation’s long-term fiscal health could mean that foreigners increasingly will demand higher interest rates to buy U.S. Treasury bonds, he said.

Also, overseas buyers probably were drawn to U.S. stocks in November by Wall Street’s sudden rally after the Nov. 2 presidential election. The market has stumbled so far this year, although it posted back-to-back gains Friday and Tuesday.

In the long run, many analysts are leery of the nation’s growing dependency on foreign capital. The overseas money helps provide the U.S. with the capital that keeps its consumer economy thriving. But as they corral more U.S. stocks and bonds, foreign investors also gain more control over American jobs.

“We are giving them ownership of U.S. assets in return for their goods,” said Joseph Carson, economist at Alliance Capital Management in New York.

For now, the jump in foreign investment in November might help to allay concerns about another sharp drop in the dollar. Indeed, the buck gained more ground against the euro on Tuesday, continuing a turnaround that began at the end of December, when the euro peaked at $1.364.

The euro slipped to $1.303 in New York from $1.311 on Friday. (U.S. markets were closed Monday for the Martin Luther King Jr. holiday.) The dollar also edged up to 102.29 yen from 101.91.

“We see a number of positives for the dollar,” said Steven Englander, foreign exchange strategist at Barclays Capital Inc. in New York. The likelihood of more short-term interest rate hikes by the Federal Reserve, and faster U.S. economic growth than in Europe or Japan, both should help support the dollar for now, he said.

The Treasury’s net capital inflow figure measures what foreigners invest in U.S. long-term securities after adjusting for what Americans send abroad through their purchases of foreign securities.

Even as foreigners bought more U.S. securities in November, many Americans were headed overseas: U.S. investors’ net purchases of foreign stocks and bonds totaled $18.7 billion for the month, the most since mid-2000, Treasury data show.

A weaker dollar can produce a windfall for Americans in overseas markets because foreign securities automatically are worth more when translated from stronger foreign currencies back to dollars. Many major foreign stock and bond markets generated bigger gains for U.S. investors last year than returns in domestic markets.

But outflows of U.S. capital to foreign markets could further erode the dollar in the long term.