Ignore Noise About Dollar's Demise

Not a Trend

That claim countered, pundits would proffer that it's not that these numbers are significant in themselves but in what they represent, being just the tip of the proverbial iceberg. While this is possible, it still seems unlikely. Surely the wars in Iraq and Afghanistan have educated us all on some of the fragmented nuances of Middle East politics. By now, few must really believe that most of the region will follow Iran's leadership in general and financial matters specifically.

The Treasury's TIC data shed light what is really going on. The most recent data cover October 2006, and indicate that OPEC countries held $97.9 billion in U.S. Treasuries. That's up from $75.4 billion in October 2005 and $62 billion in October 2004. Whatever diversification is occurring did not prevent OPEC from buying more Treasuries in the past 12 months than in the prior 12 months or the 12 months before that.

China has amassed more than $1 trillion in reserves and serves as the focal point for many observers who are concerned about the impact of diversification. Yet China holds more Treasuries now than ever before. The nation's holdings have gone up for the last 12 consecutive months without fail. In the first 10 months of 2006, China's U.S. Treasury holdings increased by $31 billion.

It is true that China's Treasury holdings increased by $78 billion in the January to October period in 2005, but this points to another aspect of the diversification story: diversifying out of Treasuries into other and higher-yielding, dollar-denominated paper such as agencies and corporate bonds as well as dollar-denominated bonds issued by other countries, such as Germany's KfW.

The TIC data indicate that foreign investors made a net portfolio investment of about $875 billion during the first 10 months of 2006. During a year in which the diversification story reached a fevered pitch at times, foreign investors probably matched if not surpassed 2005's record $1.2 trillion in purchases of U.S. assets, including direct investment.