The US dollar tumbled yesterday as the US current account deficit widened still further than expected in the fourth quarter of 2004.
The market had been braced for a gap of $183 billion (€138 billion), compared to $164.7 billion in the previous three months. However, the deficit deteriorated to $187.9 billion, a record 6.3 per cent of gross domestic product.
"The really bad news is that the current account deficit is only going to get worse in the first quarter with a good chance that it breaches 6.5 per cent of GDP," said Paul Ashworth, economist at Capital Economics.
But some saw worse news still in the revelation that net foreign direct investment flows were a negative $65 billion in the fourth quarter as US corporations invested an unprecedented $101.3 billion overseas.
"We have the long-standing issue of the US trade balance with Asia, and now the US is sending abroad considerable net foreign direct investment, much of which is likely bound for China and elsewhere in emerging Asia.
"There is no reason for this trend to change given the propensity of the US to globalise," said Michael Woolfolk, senior currency strategist at Bank of New York.
Tony Norfield, global head of forex strategy at ABN Amro, said the net FDI outflow was particularly disappointing given signs from previous data that FDI flows were starting to turn towards the US.
Sentiment towards the dollar may also have been upset by an announcement from Ukraine that it intended to swap at least 25 per cent of its reserves from dollars to euros as it moved from a dollar peg for the hryvnia to a basket mechanism.
"While Ukraine's reserves are only around $11 billion, the report plays to market concerns that central bank reserve diversification is an ongoing phenomenon," said Mansoor Mohi-uddin, chief forex strategist at UBS. - (Financial Times Service)
