Treasury Report on U.S. Capital Flows in April

June 15, 2009

Capital flow data reported by the U.S. Treasury today indicate diminishing net inflows and imply a more vulnerable dollar.  But there’s a rub.  The correlation of these so-called TIC data flows and the dollar’s performance is notoriously poor, and the latest numbers conform to that pattern.  Net foreign buying of U.S. securities declined 39% to $34.3 billion in April from $56.4 billion in March and to $25.0 billion per month in January-April from $34.4 billion per month in full-2008.  Net of U.S. net buying of foreign securities, April’s portfolio capital inflow was $11.2 billion, a fifth of March’s $55.4 billion inflow.  Two other increasingly inclusive definitions of net capital inflows (the last of which includes some short-term flows) also showed a deterioration of the net inflows of foreign capital during April.

Between the ends of March and April, the dollar was in fact steady on balance against the euro and the yen, and between the end of 2008 and the end of April the dollar appreciated 10.5% against the euro and 8.8% against the yen.  The juxtaposition of a resilient dollar against diminishing capital flow support can be explained in part by a shrinking U.S. trade deficit.  The goods and services shortfall averaged $28.9 billion per month in January-April compared to $58.0 billion in calendar 2008.  However, the paradox of capital flows seemingly inconsistent with dollar performance is not a new story, and a second explanation is that capital flows, interest rate changes, and currency movements are co-determined simultaneously in the marketplace.  One should not consider one of these three variables to be an independent determinant of the other two, that is a cause to the other’s effect.

The table below summarizes the history of the three TIC definitions of net U.S. capital flows.  All figures are expressed in billions of dollars per month.  Note that the TIC figures, unlike the quarterly Commerce Department balance of payments report due this Wednesday, omits direct investment flows.  Figures with a negative sign denote a net capital outflow.

$ billions Definition 1 Definition 2 Definition 3
April +11.2 -8.8 -53.2
March +55.4 +36.5 +25.0
Jan-April +13.0 -5.3 -65.8
2008 +42.9 +26.7 +53.2
2007 +64.7 +45.2 +51.4
2006 +74.7 +59.8 +88.5

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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