The lure of the dollar
On Friday, the Associated Press reported that the U.S. trade deficit hit an all-time high, both in terms of dollar value ($489.4 billion) and as a percentage of GDP. To finance this deficit, the U.S. needs to run a capital account surplus roughly equal in amount. The trouble is, the dollar countinues to depreciate against ...
On Friday, the Associated Press reported that the U.S. trade deficit hit an all-time high, both in terms of dollar value ($489.4 billion) and as a percentage of GDP. To finance this deficit, the U.S. needs to run a capital account surplus roughly equal in amount. The trouble is, the dollar countinues to depreciate against other currencies, and Daniel Gross argues in Slate that there's little the U.S. government can do to halt the slide, despite the wishes of the G-7. Combined, this appears to have stoked two mutually inconsistent concerns -- 1) Foreigners are purchasing too many American debts and assets; and 2) If the dollar continues to slide, foreigners won't want to buy our assets any more. On the latter front, the fears seem to be overhyped, as the Financial Times reports:
On Friday, the Associated Press reported that the U.S. trade deficit hit an all-time high, both in terms of dollar value ($489.4 billion) and as a percentage of GDP. To finance this deficit, the U.S. needs to run a capital account surplus roughly equal in amount. The trouble is, the dollar countinues to depreciate against other currencies, and Daniel Gross argues in Slate that there’s little the U.S. government can do to halt the slide, despite the wishes of the G-7. Combined, this appears to have stoked two mutually inconsistent concerns — 1) Foreigners are purchasing too many American debts and assets; and 2) If the dollar continues to slide, foreigners won’t want to buy our assets any more. On the latter front, the fears seem to be overhyped, as the Financial Times reports:
Foreign investors provided a vote of confidence in US asset markets last year by increasing the amount of money they invested in the US even as the dollar fell, according to capital flow data by the US Treasury. A monthly report released on Tuesday showed net inflows into US markets totalled $75.7bn in December last year, down from $87.5bn the month before, but still far more than the $27.7bn seen in October or the $4.2bn inflow registered in September…. Net flows into US equities rose to a strong $13.3bn in December from $8.8bn the month before compared with an average inflow of $3.1bn over the year. In the bond market, net inflows into the Treasury market slipped to $29.8bn from $33.4bn but remained well above the $22.8bn monthly average…. Michael Woolfolk, currencies strategist at Bank of New York, said the December numbers were “overwhelmingly” positive for the dollar. “It shows that the decline in US interest rates to four decade lows has not undermined foreign appetite for US securities to the degree thought earlier” he said.
As to the first concern — foreigners purchasing too many dollar-denominated securities — I’ll leave that to the commenters. I’d say the best analogy to that situation is the conditions that would prompt a run on a bank.
Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner
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