Bubble or not, foreigners not ready to dump U.S. debt

By Steven C. Johnson - Analysis

NEW YORK (Reuters) - While the U.S. government looks set to run a $1 trillion budget deficit, its main creditors in Asia probably won't be in a position to shut off the lending spigot this year.

Investors of late have started worrying about a run on the dollar in 2009 if big buyers of U.S. public debt, such as China or Japan, balk at the massive spending and borrowing plans of the Obama administration to revive the U.S. economy.

But with most developed economies deep in recession, export-reliant China and Japan may have to boost their Treasury buying in the months ahead to stop their currencies from appreciating and their exports from getting too dear.

Japan may even make its first currency market intervention in five years by buying Treasuries to weaken a yen that rose to 89 per dollar on Monday, about 10 yen from its all-time high.

"The exporting economies are sucking wind," said Charles Dumas, a former JPMorgan Chase economist who heads the research department at Lombard Street Research in London.

By controlling the value of their currencies against the dollar over the last decade, China and other emerging Asian countries ensured that their growth was dependent on U.S. consumption, leaving them vulnerable to a downturn.

Chinese exports have declined sharply since October and some economists expect them to fall at an annual rate of about 20 percent in coming months, an alarming prospect for the world's most populous nation, which has made exports the cornerstone of its drive to create wealth and jobs.

The rest of the region is also struggling. Taiwan's exports plunged a record 42 percent last month and Japan suffered a record annual decline in November.