US current account deficit hits $144.9bn

The US current account deficit widened to $144.9 billion (€119.4 billion) in the first quarter - a record in dollar terms, and a sharp rise from the $127 billion deficit in the fourth quarter of 2003.

The current account deficit, a broad measure of trade and investment flows, is equal to just over 5 per cent of US gross domestic product, an increase of half a percentage point from the previous quarter.

The deficit reflects the fact that the US is spending more than it earns, as well as weak demand growth outside the US, which affects US exports. At current levels, the US needs to attract more than $1.5 billion of net investment per day from abroad to cover the current account shortfall.

The wider-than-expected deficit put pressure on the dollar, which declined against a basket of currencies and reached a six-week low against the yen in morning trading. There were few surprises in the report, which continues a well- established trend.

"The market can be influenced by record numbers, even when they are stale and do not tell us anything we did not already know," said Mr Steven Englander, chief currency economist at Barclays Capital in New York.

The deficit of $136.9 billion in trade in goods and services accounts for the lion's share of the imbalance, and the increase from the $125.5 billion trade deficit in the fourth quarter accounts for more than half the deterioration - in part reflecting the higher cost of energy imports.

Foreign-owned assets in the US increased by $447.6 billion in the quarter. Foreigners bought $66.4 billion in US treasuries, compared with $4.7 billion in the fourth quarter. Net foreign investment in US stocks and non-treasury bonds rose by $62.3 billion, compared with an $83.8 billion increase in the prior three months.

As demand for US assets among foreign private investors has waned, overseas official purchases of US treasuries have filled the gap.

Bond prices have gained this week, following better-than-feared consumer price inflation data for May, and reassurance from Mr Alan Greenspan, the Federal Reserve chairman.

Mr Greenspan told a congressional panel this week that the US central bank did not foresee inflation getting out of control and that it believed it would be able to raise interest rates at a measured pace.

Mr Greenspan said the US current account deficit in large part reflected superior risk-adjusted returns for US assets which attract foreign investors. However, a change in behaviour among investors could lead to a sharp decline in the dollar and a rise in long-term interest rates.