WASHINGTON (AFP) — The United States has maintained foreign capital inflows to finance its big balance of payments deficit but any dropoff in investment could end up hurting the economy, a Federal Reserve report showed Thursday.
The report by economists at the New York Fed indicated the United States has been keeping up its share of cross-border capital flows despite a weak dollar and worries about the strength of the US economy.
Yet they echoed concerns by many private economists about a loss of confidence in the dollar that could provide a shock to the world's biggest economy and put further pressure on the US currency.
"In recent years, the US deficit has been large enough to absorb the lion's share of surpluses generated abroad," the report said.
"Indeed, from 1999 through 2006, the cumulative US borrowing of 4.4 trillion dollars amounted to some 85 percent of the net external financing provided by countries with surplus saving.
"Despite this heavy borrowing, however, the United States has been the destination for little more than 30 percent of total gross cross-border investments by other countries, a figure that only slightly exceeds the US share of global GDP and is below the US weight in global financial portfolios."
They said that as a result, the United States has been able to finance its large current account deficits without requiring foreign investors to shift into more dollars.
But the Fed report said it remains unclear whether the trend in global financial markets will continue.
"It might be harder to finance continued large current account deficits on favorable terms if the recent wave of financial globalization were to subside," the report said.
"The United States would then have to attract a larger share of other countries' foreign investments."
The US current account deficit, the broadest measure of trade and investment flows, narrowed in the third quarter to 178.5 billion dollars.
The balance of payments deficit declined to around 5.1 percent of US economic output or gross domestic product (GDP) during the quarter, marking its lowest level since the first quarter of 2004 and shaving several percentage points off during the second quarter.
A high deficit could lead to a loss of confidence in the dollar and require higher interest rates to US bonds and other investments.
"The fact that foreign investment in the United States has been outpacing the US current account deficit might appear to support concerns about foreign portfolios growing increasingly lopsided," the report said.
But because of the dollar's weakness, the authors noted that "flows to the United States must be rising more rapidly than flows to other countries" to finance the US deficit.
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