Capital Flows into the US
The BEA released its estimate of the US current account balance for the third quarter of 2005:
The U.S. current-account deficit–the combined balances on trade in goods and services, income, and net unilateral current transfers–decreased to $195.8 billion (preliminary) in the third quarter of 2005 from $197.8 billion (revised) in the second quarter. The decrease was more than accounted for by a decrease in net outflows for unilateral current transfers, a shift to a surplus on income from a deficit, and an increase in the surplus on services. In contrast, the deficit on goods increased.
More interesting to me than the current account, however, are some of the details contained in the capital account.
The capital account is that portion of the balance of payments table that tracks international purchases and sales of assets, rather than goods and services. Today’s figures confirm that foreign central banks have, as far as we can tell, significantly slowed their purchases of dollar assets compared to the pace in 2004. On the other hand, private firms and individuals abroad have been steadily increasing their appetite for US paper assets – stocks, bonds, and bank accounts – as the following chart illustrates.
It’s worth mentioning that these two phenomena (greater private capital flows into the US, smaller purchases of dollar assets by foreign central banks) are intimately related. Central banks have been able to reduce their purchases of dollar assets precisely because private agents around the world have been more willing to accumulate dollar assets. And looked at the other way, private agents may be more willing to hold dollar assets because it appears that the pressure on the dollar (as measured by how many of them foreign central banks are being forced to buy) has diminished substantially this year.
For whatever reason, it seems that confidence in the dollar and in US paper assets (note that foreigners have not yet regained their appetite for direct investment in the US, i.e. for directly purchasing US firms or building up their US businesses) has grown in 2005. Fears of an immediate fall in the dollar do not seem widespread among the world’s investors.