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Sharp Fall in Current Account Deficit in 3Q Not Enough Yet to Take Pressure Off Dollar

MarketWatch, among others, tells us today that the current account deficit fell in the third quarter to 5.1% of GDP, down from 5.5% in the second quarter. That’s unquestionable progress. However, as the article also points out in a rather anodyne fashion, “Few economists believe a current account deficit of 5% of GDP is sustainable.” In general, a current account deficit in excess of 4% will lead to currency revaluation. The dollar isn’t out of the woods yet.

But good news on another front: Bloomberg reports that foreign purchases of financial assets rose sharply in October. That’s good news after a few months in which private sector inflows into the US were missing in action. It will be interesting to read Brad Setser’s take on this (sadly, too pressed to read the Treasury International Capital report just now).

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One comment

  1. Anonymous

    Regarding inflows, Minyanville is saying that optimism is premature:

    The increase in foreign inflows is mostly from the UK increasing its purchases of U.S. treasuries. Why? It is what we told Minyans to expect: as credit unwinds there will be demand for dollars. This is why the UK bought treasuries. Everyone wants treasuries. Debt is unwinding.

    I’m not sure I follow this, and they don’t provide a link to any prior article in which they may have made this argument. Can someone clarify?

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