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US Dollar New Year Prospects Improve on TIC's, Current Account Reports

Monday, 17 December 2007 19:01:37 GMT  |  David Rodriguez, Currency Analyst

The US dollar rallied to two-month highs against the euro through the early London currency trading session, as a continued unwind of forex positioning allowed the greenback further relief through year-end price action. Traders looked increasingly determined to clear their books of all dollar-short positions—especially as key Asian and European equity markets showed sizeable losses to start the last full week of trading for 2007. Positive surprises in both US Current Account and Net Long-term Treasury International Capital Flows reports likewise improved sentiment for the downtrodden dollar, while marginal disappointments in Empire Manufacturing and NAHB Housing Market Index figures had little impact on USD trading.

The US Current Account Deficit fell to its lowest in two years, as a noteworthy improvement in the Trade Balance Deficit and increase in income surplus pushed the net balance of payments to 5.1 percent of national GDP. A subsequent Net Long-term TIC’s report likewise boosted outlook for the US balance of payments, as foreign investors were heavy net-buyers of US securities through the month of October. Net long-term securities flows reached an impressive surplus of $114.0B—twice consensus forecasts and the highest since May. The surprising result was a function of a surge in private net investments at $96.2B, while sovereign net purchases actually declined to a more moderate $21.8B through the period. The pullback in net official investment in US securities markets notwithstanding, the report certainly speaks well for foreign interest in US financial markets. Indeed, the net $114.0B in capital infusion completely offsets the October -$57.8B trade balance deficit, and such encouraging results can only boost the US dollar’s prospects through 2008. 

Written by David Rodríguez, Currency Analyst for DailyFX.com

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