Financial Times - September 15, 1999
DOLLAR SINKS AS DEFICIT REACHES RECORD HIGH
Analysts fear that the trend will continue, as stock prices fall and the value against the yen hits a three-year low. By Alan Beattie in London and Mark Suzman in Washington
The dollar sank sharply yesterday as a record current account deficit and strong retail sales data threatened a shortage of capital flows into the US.
Stocks and bond prices fell in the US after the data were released, raising the prospect of international investors fleeing the US for other markets. This drove the dollar down to a fresh three-year low against the yen of ¥105.1.
The current account deficit soared to an all-time high of $80.7bn (£49.7bn) in the second quarter, a 17.5 per cent increase from the revised $68.7bn deficit in the first quarter and a record both in dollar terms and as a share of gross domestic product.
Although the deficit was only slightly higher than market expectations, it increased analysts' concerns that there is little end in sight to the trend.
Yesterday the Dow Jones Industrial Average closed 1.09 per cent down, while the benchmark long bond fell nearly 1 point to 100 1/8, sending the yield up to 6.115 per cent.
The US currency's strength has been sustained for several years by foreign investment in US assets. This has compensated for the deficits on the current account, which mainly comprises trade in goods and services and income from investments abroad.
But recently Japanese investors - the largest foreign holders of US Treasuries - are reported to have been deserting US assets and repatriating capital to Japan, helping the yen to rise.
Yesterday the Bank of Japan intervened in the foreign exchange markets for the second time in a week to slow the yen's appreciation against the dollar, but their estimated $1bn-$2bn sales of yen had little effect.
The US has said it supports the principle of a strong dollar but has indicated it is not prepared to intervene in the currency markets at this stage.
Analysts said that with the dollar weakening, there was increasing doubt in the markets whether foreign investors would continue to prop up the current account deficit by buying US assets. "Foreign investors are asking themselves why they should keep funding the US to consume itself silly," said Tony Norfield, global head of treasury research at investment bank ABN-Amro.
The Commerce department also reported yesterday that retail sales rose by 1.2 per cent in August to $252.4bn, up 10.6 per cent from the same period a year ago. The rise between June and July was also revised up from 0.7 to 1 per cent.
The largest increase came in sales of durable goods, which rose by 1.8 per cent on the month and were 14.1 per cent up on last year. Mr Norfield said the retail sales data contributed to a fear that the Federal Reserve was "behind the curve" on restraining US growth and would have to raise interest rates.
The biggest culprit in the current account deficit was a continuing imbalance in goods and services, as a hoped-for increase in exports to recovering Asian economies failed to materialise.