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Financial Post, Weekly edition, Thu 05 Oct 95, page 25

Keywords: International finance Bond market

The problem with co-operation

Bud Jorgensen

Finance ministers and central bankers from the Group of Seven countries are to meet in Washington on the weekend and the talk on foreign exchange desks is about the possibility of co-ordinated action to support the US$.

The justification for such talk is the series of co-ordinated interventions carried out by major financial powers in recent months.

It's not the U.S. that wants a stronger currency. Rather it is Japan that wants a weaker yen. Other countries have joined in the buying of US$s over the fear of a collapse of the fragile banking system in Japan.

Thus, there has been speculation that G-7 finance ministers will strike a deal like the 1985 Plaza Accord, when they met in New York and agreed to co-ordinated selling of what was then seen as an overvalued US$.

The question now is whether the US$ is undervalued.

Many think not and an analysis of buying patterns of U.S. treasury bonds suggests that international co-operation is creating a new problem.

The fixed-income research department at Dean Witter Reynolds Inc. of New York says figures on flows of U.S. investment funds show that foreign investors have been the biggest buyers of U.S. treasuries this year.

Foreigners have been buying U.S. government bonds on a scale that far exceeds previous patterns -- US$381 billion in the first half of this year compared with US$227 billion in the previous four years.

Dean Witter says it appears that foreign central banks went on a U.S. bond buying binge after accumulating US$s.

``The propping-up of the currency is basically an artificial way of avoiding the painful solutions that are needed to correct a gaping current account deficit, which is obviously the reason behind the currency's weak standing to begin with,'' it said.

As interest is paid on bonds held outside the U.S., the outflow of US$s becomes a bigger problem.

Flows of funds into foreign hands raise questions about continued G-7 resolve to buy greenbacks.


                                    Previous      Spread off
   Bond or bill        Latest %      close %          Canada

Canada 3-mo. T-bill 6.37 6.33 U.S. 3-mo. T-bill 5.46 5.50 91 Canada 10-yr bond 7.70 7.70 U.S. 10-yr bond 6.09 6.12 161 Australia 10-yr bond 8.57 8.58 -87 Britain 10-yr bond 7.99 8.00 -29 France 10-yr bond 7.46 7.44 24 Germany 10-yr bond 6.51 6.56 119 Japan 10-yr bond 2.79 2.85 491 Canada 30-yr bond 8.12 8.12 U.S. 30-yr bond 6.44 6.46 168

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Revised: May 10, 1996

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