More dollar woes

Hank Paulson is likely to get beat up a bit over the falling dollar when he meets with his fellow finance ministers tomorrow at the G7 summit.  And this won't help matters one bit:

Japan and China led a record withdrawl of foreign funds from the United States in August, heightening fears of a fresh slide in the dollar and a spike in US bond yields.

Data from the US Treasury showed outflows of $163bn from all forms of US investments. "These numbers are absolutely stunning," said Marc Ostwald, an economist at Insinger de Beaufort.

Asian investors dumped $52bn worth of US Treasury bonds alone, led by Japan ($23bn), China ($14.2bn) and Taiwan ($5bn). It is the first time since 1998 that foreigners have, on balance, sold Treasuries.

Of course, Paulson will continue to say a "strong dollar is in the U.S. interest," or words to that effect.  As we've documented before, he says it nearly as often as a hotel bellman says "Good morning."  But it doesn't mean a thing:

David Woo, an analyst at Barclays Capital, said Washington was happy to see the dollar slide. "They don't care so long as the fall is not disorderly. They see it as a way of correcting the deficit. " he said.

This "orderly" meme also turns up today in an FT story about an IMF forecast of a continued dollar decline:

The US currency has seen an orderly retreat so far but remains overvalued compared with its medium-term fundamental level, IMF officials said yesterday.

The IMF cut its forecasts for world economic growth next year in the wake of the credit squeeze.

Simon Johnson, chief economist, said the weakening dollar was part of a normal process of economic rebalancing and was positive for the global economy provided that other currencies also adjust. Mr Johnson said the dollar's fall had been anticipated by the IMF for some time.

That's international bureaucracy for you: A conscious policy of devaluing the dollar to prop up the economy in the short term is considered a "normal process of economic rebalancing."  Sheesh.

Paulson and the IMF can yak all they want.  We know what the falling dollar really means.

The Daily Reckoning