Dollar Weakness Continues as Capital Flows Out of US

The US dollar has been under pressure for five out of the last six days due to several factors. The Treasury's intention to buy back $6 billion worth of long-term bonds, and its plans to carry out six such operations by early November have disappointed investors who were expecting a bolder move. This led to rising yields on Treasuries, but the dollar saw a brief respite before being pressured once again by fears over the ECB's hawkish rhetoric.

A more significant factor in the medium- and long-term weakness of the US dollar is the repatriation of capital to Japan. The fall in USDJPY is not solely due to currency interventions and rising expectations of aggressive monetary tightening from the Bank of Japan. If domestic yields continue to rise, Tokyo will be able to keep more money at home.

Japan's residents hold $5 trillion in foreign assets, and if this flood of money pours out of the US and Europe into Asia, USDJPY and EURJPY are bound to fall. Norway is ready to invest billions of dollars in Japanese assets, which could lead the way in capital repatriation.