The us needs to attract around £2.5bn per day to make up the current account deficit, with any shortfall potentially weakening the dollar
The US current account deficit widened to a record $225.6bn (£150.99bn) last quarter, as the trade gap grew and the country paid more interest to overseas investors.
The shortfall in the current account, the broadest measure of trade because it includes transfer payments and investment income, followed a revised $217.1bn second-quarter gap, the Commerce Department said in Washington.
The trade deficit ballooned last quarter when oil prices surged and imports from China flooded in. Stronger economies abroad and a weakening dollar suggest exports will strengthen and the trade balance will improve in coming months, lessening the risk that foreign investors turn their backs on US assets.
"Improvement is going to be a slow process,'' said Chris Low, chief economist at FTN Financial in New York. "The important thing though is that the deficit isn't growing as fast as it was before, which is exactly what you want to see. Sudden shifts would scare financial markets.''
The US needs to attract about $2.5bn a day to fund the gap, and any shortfall would potentially undermine the value of the dollar. The gap amounted to 6.8% of the economy, the second-most ever, compared with 6.6% in the second quarter. The deficit reached a record 7% of gross domestic product in 2005's fourth quarter.
Economists forecast a third-quarter deficit of $225bn, according to the median estimate of 39 economists in a Bloomberg News survey, after an initially reported $218.4bn shortfall the previous quarter.
Meanwhile, the deficit in trade, which accounts for about 90% of the total current account imbalance, widened to $200.3bn last quarter from $193.1bn in the second quarter.
US investors received less income on their holdings of overseas investments than foreigners received here. That helped to widen the overall current account deficit.
Income on overseas assets held by US investors rose to $160.8bn from $156bn. Foreign earnings on US assets, including wages and other compensation, rose to $164.6bn in the third quarter from $158.2bn in the previous three months. That left $3.8bn deficit on income payments, the largest ever, compared with a $2.2bn shortfall in the second quarter.
US government payments to foreigners and other private transfers abroad registered a $21.5bn deficit, compared with the $21.9bn deficit in the prior quarter.
A growing deficit would pose a risk to the economy should investors sour on US assets and diversify to other countries because it may precipitate a sharp weakening of the dollar and push interest rates higher.
"Continued large US deficits will keep talk of potential instability in US asset markets in play,'' said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado. A "likely significant moderation" in the fourth- quarter gap will help assuage those concerns, he added.
The dollar has fallen 1.4% this quarter against a basket of currencies and dropped 4.6% over the year. The decline in the dollar has already made some foreign investors wary. "We recognise the weakness of the dollar at this time and we are naturally concerned about it,'' said Organization of Petroleum Exporting Countries president Edmund Daukoru during a press conference in Nigeria.
Daukoru said the group has looked into pricing oil using a mixture of yen, dollar, euro and sterling and for now has ruled against any immediate change.
Furthermore, international investment in US long-term securities rose in October as stocks climbed and demand for Treasury notes rebounded, a recent government report showed. Purchases of stocks, notes and bonds also increased to a net $82.3bn, from a revised $70.2bn in September, according to a report from the Treasury.
The trade gap narrowed 8.4% in October, the most in almost five years, to $58.9bn, the government said on 12 December.
The improvement came even as the US had a record short-fall with China, which is on course to surpass Mexico this year as the nation's second-biggest trading partner behind Canada.
A widening deficit with China is aggravating trade tensions between the two nations. Some US lawmakers have called for higher tariffs and other measures against the Asian nation for currency policies that they say unfairly assist Chinese exports.
"We are impatient for quicker change," US Steel chief executive officer John Surma said in an interview in early December.
Surma participated in US Treasury secretary Henry Paulson's meeting on 4 December with the National Association of Manufacturers' China Business Task Force.
In two days of talks with Paulson, China reaffirmed pledges to make its currency more flexible, while the US said it will boost its savings rate to reduce its trade imbalance. Both countries have made similar promises at past meetings.
Federal Reserve chairman Ben Bernanke, who also took part in the talks, urged China to let its currency gain at a faster pace to end a 'distortion' that benefits exporters.
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