Thread,
Here's a much better version of a post I did earlier. Contains some interesting figures and basic international economics concepts. This news is only a week old, but the government's report just covers Q1 only. I'm not sure how Q2 went. That would be interesting to know.
MikeM(From Florida)
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Bridge Over a Broadening Trade Gap
When foreigners want to invest money in the United States, they must sell other currencies and acquire dollars, a process that drives up the dollar. The Asian crisis has been a factor, as investors pulled their money out and reinvested it in what was perceived as a much safer place, the United States.
These forces have an interesting interactive effect. As conditions soured in Asia, the currencies of most countries there fell significantly compared with the dollar. That meant that what economists call the "terms of trade" shifted sharply in favor of the United States. That is, American buyers are paying less than before for goods and services imported from the region, and therefore probably buying more as a result.
Meanwhile, the capital has been flowing in, as the Federal Reserve described yesterday in its semiannual report to Congress on monetary policy and the economy: "The booming U.S. stock market continued to attract large foreign interest. Foreign direct investment in the United States and U.S. direct investment abroad continued at near record levels in the first quarter of 1998, spurred by strong merger and acquisition activity across national borders."
Private foreign investors bought $29 billion more in U.S. stocks than they sold in the first quarter of the year. That followed record net purchases -- the difference between purchases and sales -- of $66 billion in all of the year 1997. Foreign net purchases of U.S. corporate bonds remained substantial. Net purchases of U.S. government agency bonds reached a record $21 billion.
The deeper a nation's trade deficit, the more it has to rely on capital inflows from outside the country to finance the shortfall. Because so many foreigners want to invest in the United States, recent inflows have been considerably larger than the U.S. current account deficit (trade and other transfers). That's helped push up the dollar's value higher against most other currencies.
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