Capital flight threatens to weaken dollar

By YASUHIRO ONAKADO Soaring oil prices and the euro's weakness have fueled worries about weak U.S. company profits.

Shares of U.S. technology companies came under severe selling pressure in recent weeks, following the downward revisions of their earnings estimates for the third quarter.

The question now is whether a flight of capital away from the U.S. financial markets is in the offing.

The U.S. current-account deficit is now running at an annual rate of $419 billion, roughly 4.2 percent of gross domestic product, according to International Monetary Fund estimates.

When the Group of Five industrial nations wrapped up the Plaza accord in September 1985, under which they committed themselves to a concerted effort to drive down the then high-flying dollar, the U.S. trade deficit amounted to 2.8 percent of GDP.

A flight of investment money much needed to finance the U.S. trade deficit should trigger a precipitous fall in the dollar's value.

The Dow Jones industrial average stood barely above 10,000 late last week, down some 15 percent from its recent peak, and the technology-heavy Nasdaq composite index slumped to close to 3,000, down some 40 percent.

Despite the selloffs, nonetheless, the price of the average component of the Nasdaq index remains at a high level of around 80 times earnings.

The selloffs could have taken much wind out of speculative sails on Wall Street.

Investors are focusing on sober reality when evaluating share prices and underlying corporate earnings prospects.

The dollar's trade-weighted rate against a basket of other currencies, as calculated by the U.S. Federal Reserve, has climbed past 100, a development seen only several times since the Plaza accord.

The rate now appears higher than reasonable, and the dollar's correction is inevitable to some extent.

If the U.S. intends to keep dollar-based securities attractive to international investors, the trade-weighted dollar rate must come down to barely above 90.

Still, the dollar is likely to gain further ground against the euro, though its steep rise against the yen appears unlikely.

Yasuhiro Onakado is assistant general manager of the market research group at Sakura Bank.

The Japan Times: Oct. 18, 2000

http://www.japantimes.co.jp/cgi-bin/getarticle.pl5?nb20001018b4.htm

-- Martin Thompson (mthom1927@aol.com), October 17, 2000