Dollar's Capital Flow Support Diminishing

September 16, 2009

Released capital flow data from the U.S. Commerce and Treasury Departments today shed light on why the dollar has been struggling despite a greatly reduced current account deficit.  The current account shortfall last quarter dipped under $100 billion for the first time since the quarter of the 9/11 attacks and equaled 2.8% of GDP, slightly below 2.9% in 1Q09 and 5.2% in the second quarter of last year.

The net outflow from high-quality long-term capital movements between the United States and other countries more than doubled, however, to $119.7 billion from $54.9 billion in the first quarter and represented a $254.5 billion adverse swing from the final quarter of 2008, when U.S. assets attracted funds in search of safety.  The table below documents funding of the U.S. current account gap last quarter and compares such to the four prior quarters, with dollar amounts expressed in billions of U.S. dollars.  The double-entry accounting convention for every single transaction constrains the sum of the current account, private capital flows, and officials capital flows to always equal zero, but not every dollar of capital movement is equally significant from the standpoint of lending the dollar support.  The most reliable current account financing comes from two types of long-term items, direct investment and portfolio investment, which are isolated in the fifth line of the table.  The final row presents the period average trade-weighted value of the dollar, using the Fed’s “major currency” index, and this shows a 4.0% depreciation from 82.7 in 1Q09 to 79.4 in 2Q09.  The index last Friday was at 74.6, 6.0% less than the 2Q mean value.

  2Q08 3Q08 4Q08 1Q09 2Q09
C/A -187.7 -184.2 -154.9 -104.5 -98.8
% of GDP -5.2 -5.1 -4.3 -2.9 -2.8
Official +136.0 -110.6 -284.4 +314.0 +315.2
Private +51.8 +294.8 +439.3 -209.6 -216.4
Dir & Port -4.5 +65.4 +134.8 -54.9 -119.7
TW$ 70.9 73.5 81.4 82.7 79.4


A second table below breaks down long-term capital inflows into their component parts for both the first and second quarters of 2009 and indicates the changes between them in a third column.  The components include U.S. direct investment abroad, foreign direct investment in the United States, U.S. net purchases of foreign bonds, U.S. net buying of foreign stocks, and foreign net buying respectively of U.S. Treasuries, corporate bonds, agency bonds, and equities.  Amounts again are expressed in billions of dollars.  Positive signs in the quarterly columns indicate net purchases, whereas negative signs reflect net sales.  For the column entitled “change,” a positive sign indicates an increased net inflow, a reduced net outflow, or a swing from a net outflow to a net inflow.  The sum of these third-column changes is negative $64.8 billion, which corresponds to the difference between the 1Q09 outflow of $54.9 billion on direct and portfolio investment shown in the first table above and the larger outflow of $119.7 billion in the second quarter.

  1Q09 2Q09 Change
U.S. DI Abroad +40.9 +44.9 -4.6
Fgn DI in U.S. +23.9 +26.1 +2.2
U.S. + Fgn Bonds +34.4 +55.2 -20.8
U.S. + Fgn Stocks +1.8 +37.2 -35.4
Fgn + Treasuries +53.7 -22.7 -76.4
Fgn + U.S. Corporates -12.4 -22.0 -9.6
Fgn + U.S. Agencies -49.7 +0.4 +50.1
Fgn + U.S. Equities +6.1 +35.8 +29.7


If one excludes net foreign transactions involving Treasury securities, the remaining long-term capital movements were actually slightly more supportive in the second quarter than the first quarter, with solid improvements in U.S. agency bonds, U.S. equities, and foreign net buying of U.S. stocks.

The Treasury TIC data released today covered July and thus provide information on capital flows that are more recent than the more comprehensive Commerce Department quarterly release of all U.S. international transactions.  Treasury’s narrowest definition of long-term capital items produced a net inflow of onl
y $15.3 billion in July, 83% smaller than in June and just a fourth as much as street expectations
.  The widest aggregate of capital flows, including short-term flows and most long-term movements except direct investment, printed a net outflow of $97.5 billion in July after $56.8 billion in June.  My third table below highlights a progressive deterioration in these two classifications of Treasury net capital flows from 2008 to 2Q09 and then July.  Figures for calendar 2008 and the second quarter of 2009 are expressed on a per month basis.

Billions of Dollars 2008 2Q09 July
Narrow Definition +42.9 +24.4 +15.3
Broad Definition +56.3 -66.5 -97.5

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



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