US current account deficit hits $195bn for first quarter

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The US current account, the most comprehensive measure of the country's transactions with the rest of the world, hit a record deficit of $195bn (£107bn) in the first quarter, equivalent to 6.4 per cent of GDP.

The US current account, the most comprehensive measure of the country's transactions with the rest of the world, hit a record deficit of $195bn (£107bn) in the first quarter, equivalent to 6.4 per cent of GDP.

The deficit reported by the Commerce Department yesterday exceeded even the gloomiest market expectations, reaching what many economists consider an unsustainable level. But Wall Street shrugged off the news, with the Dow up some 35 points at mid-session.

The figure reflected a surge in the US trade deficit to $186bn, coupled with a sharp increase in financial transfers, mostly as aid and remittances after the tsunami disaster in south-east Asia. The expectation is that the current account will improve somewhat in the second quarter, reflecting a drop in the cost of oil imports this spring. But the sheer size of the deficit is bound to produce new demands here for China, whose bilateral surplus with the US is responsible for one-quarter of the annual trade deficit ($667bn in 2004), to allow its currency to rise.

Despite falling against the euro and other major industrial country currencies, the dollar has actually climbed 1 per cent since 2002 against the Chinese renminbi and other currencies in the developing world.

"Were foreign governments to stop manipulating their currencies, the US trade deficit would be cut by half, US growth would accelerate to 4.5 per cent, and unemployment would be below 4.5 per cent by the end of 2006," Peter Morici, a professor of business at the University of Maryland, said.

The dollar lost a further 1 per cent of its value in the first quarter, the Commerce Department said. But the currency has been helped by relatively robust growth, coupled with the prospect of further increases in short term US interest rates.

The key factor has been massive purchases of US government securities by the Chinese and other Asian central banks. This has ensured a demand for surplus dollars, and helped peg the renminbi at an artificially low rate. But it has also generated deep unease among financial analysts, as the US appetite for imports shows no signs of abating.

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