Record Current Account Deficit = Countries Selling Dollars: Bonddad

Dec 19, 2006

By Bonddad
bonddad@prodigy.net


The U.S. current-account deficit widened to a record $225.6 billion last quarter as the trade gap grew and the country paid more interest to overseas investors.

The shortfall in the current account, the broadest measure of trade because it includes transfer payments and investment income, followed a revised $217.1 billion second-quarter gap, the Commerce Department said today in Washington.

Stronger economies abroad and a weakening dollar have trimmed the trade deficit in recent months, raising the prospect the current-account gap won't deteriorate much more. A smaller deficit reduces the sum the U.S. needs to attract from overseas, diminishing the dollar's vulnerability to an extended decline.

The BEA reported that:

Goods exports increased to $262.1 billion from $252.8 billion. The increase resulted from increases in all major commodity categories.

Goods imports increased to $480.7 billion from $463.4 billion. The increase resulted from increases in petroleum and products and in most major categories of nonpetroleum products.
In other words, the US can’t export its way out of this problem. In addition, so long as the US is oil dependent the current account will be difficult to cure.

Sometime over the last year the general refrain from the Right Wing Noise, economics division was the current account didn’t matter. Their central argument had two prongs, neither of which had any weight. The first was the US was essentially too big to fail. The second was the current account had been around so long with nothing bad happening that it was something we shouldn’t worry about. But the US dollar has taken a hit recently, and is currently trading at yearly lows and is approaching multi-year lows.

US interest rates – which were noticeably higher than other countries for the last several years – protected the dollar’s value for the last year and a half. However, European interest rates are increasing. In addition, the US economy is slowing which makes the dollar less attractive.

Compounding this development is accelerating European growth which makes the euro more attractive. As a result of all these events – the narrowing interest rate differential, the mammoth US current account and accelerating growth elsewhere – various countries are moving away from the dollar. Iran is the latest country to announce a move to euros:
Iran is to shift its foreign currency reserves from dollars to euros and use the euro for oil deals in response to US-led pressure on its economy.

In a widely expected move, Tehran said it would use the euro for all future commercial transactions overseas.

Analysts said Tehran had been steadily shifting its foreign-held assets out of dollars since 2003 and that Monday's announcement was unlikely to affect the value of the dollar, which has weakened significantly in recent months.

And Iran is not alone.

Venezuelan leader Hugo Chavez is directing a growing share of the country's oil profits into euros as the dollar and crude prices fall.

The dollar, down 9.5 percent against the euro this year, may face more pressure in 2007 because Venezuela and oil producers from the United Arab Emirates to Indonesia plan to funnel more money into the single European currency.

Banco Central de Venezuela has slashed the percentage of its $35.9 billion worth of reserves invested in dollars and gold to 80 percent from 95 percent a year ago, said Maza Zavala. The country, the world's fifth-largest oil supplier, has boosted its euro holdings to 15 percent, from less than 5 percent in the same period.

And they are not the only one:

Bank Indonesia is boosting euro holdings, said Senior Deputy Governor Miranda S Goeltom in a Dec. 13 interview in Jakarta. Indonesia has $39.9 billion in reserves. Sultan Bin Nasser al- Suwaidi, the governor of the Central Bank of the UAE, last month said he was considering when to shift as much as 8 percent of the nation's $24.9 billion in reserves into euros.

The central banks are changing policy ``because the oil price has come down a long way and the U.S. dollar has been declining,'' said Michael Derks, chief markets strategist at Arch Financial Products LLP, a London-based hedge fund. ``The euro stands to benefit.''

They are certainly not alone

Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.

The revelation in the latest BIS quarterly review, published on Monday, confirms market speculation about a move out of dollars and could put new pressure on the ailing US currency.
The dollar is not in a good place. The US economy is slowing and there is a massive trade deficit further weakening its value. Global interest rates are closing in on US rates, taking away the carry trade. And the US’ popularity in some regions is at an all-time low.

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