WASHINGTON -- Foreign demand for long-term U.S. financial assets plummeted in May as Japan and Russia trimmed their holdings of Treasury securities.
The Treasury Department said Thursday that foreigners actually sold $19.8 billion more long-term U.S. securities than they purchased in May. That compared with net purchases of $11.5 billion in April.
"Better stock market performance had led to easing risk aversion in May and that has led to losses in the dollar," said Brian Dolan, chief currency strategist at Forex.com.
"But this data may be completely reversed in June because of the huge Treasury issuance last month and we could see foreign investors piling back into Treasuries. May's capital flows report if anything is an anomaly."
China, the largest foreign holder of U.S. Treasury securities, bucked that trend. Its holdings rose to $801.5 billion, an increase of 5% from $763.5 billion in April.
China's holdings are a direct result of the huge trade deficits the U.S. runs with the emerging Asian power. The Chinese take the dollars Americans pay for Chinese products and invest them in Treasury securities.
American manufacturers argue that gives China unfair trade advantages by keeping the dollar overvalued against the Chinese currency, which makes U.S. goods more expensive for Chinese consumers and Chinese products cheaper here.
Both the Bush and Obama administrations have argued that China should allow its currency to rise faster in value against the dollar but the yuan has stopped appreciating against the dollar in recent months.
Japan, the second largest foreign owner of Treasury securities, trimmed its holdings 1.3% to $677.2 billion in May, from $685.9 billion in April.
Russia cut holdings even more sharply, reducing them 9.1% to $124.5 billion in May from April.
Oil exporting countries, another large holder of Treasury securities, boosted their holdings 1.8% to $192.9 billion.
Treasury Secretary Timothy Geithner traveled to Saudi Arabia and the United Arab Emirates this week to assure those governments that the administration is committed to getting its soaring budget deficits under control once the current recession and financial crisis have been contained. Geithner delivered a similar message to the Chinese in a trip to Beijing a month ago.
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