NCPA - National Center for Policy Analysis


December 6, 2004

Foreign financing of America's current account deficit, a broad trade measure that includes investment flows, might soon come to an end and along with it the crash of the dollar, say observers.

America's vibrant economy has led to large purchases of foreign goods. In turn, foreign countries use these dollars to invest in the U.S. economy. Also, these nations continue to prop up the value of the dollar so that their export industries can continue to flourish:

  • In 2004, the U.S. account deficit amounts to 5.6 percent of gross domestic product (GDP), representing 77 percent of the world's total current account deficits.
  • To prevent the dollar from declining, central banks in Japan, China and other Asian countries have purchased more than $1 trillion of U.S. treasury securities.
  • Foreigners own about 13 percent of U.S. stocks, 24 percent of corporate bonds, and 43 percent of U.S. treasury securities.

Yet at some point, due to excess risk or better investment opportunities, foreign nations may slow their financing of America's current account deficit. Already there are signs that this may be on the horizon:

  • The Japanese yen has risen 8 percent against the dollar over the past two months and the Korean won has risen by 11 percent over the last year;
  • Similarly, the Singapore dollar has risen by 5 percent over the past four months to its highest level since 1998.

China, however, with a 6 percent share of the world's exports has yet to raise the value of its currency. Thus, so long as China refuses to revalue its currency, this global arrangement of high U.S. trade deficits may continue, say observers.

Source: Christopher Wood, "Currency on a Collision Course," Wall Street Journal, November 29, 2004; and Robert Samuelson, "The Dollar Problem," Washington Post, November 17, 2004.

For Wood text (subscription required),,SB110168191172485107-search,00.html


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