Forex Blog: Currency Trading News & Analysis.

January 12th 2006

Feldstein: USD must fall to close deficit

Despite a current account deficit that smashed through the $800 Billion mark last year and continues to expand, many currency traders remain bullish on the USD. Their reasoning is that as long as foreigners remain willing to buy US assets and indirectly finance the US deficit, than the USD will continue to appreciate. However, notes Harvard economist Martin Feldtsein, this line of reasoning is becoming increasingly tenuous. Contrary to data released by the Treasury department, much of the foreign capital the flowed into the US last year was contributed by public/governmental institutions, rather than private investors, as had previously been put forward. Feldstein further argues that as interest rate differentials between the US and other nations narrow over the next year or so, many investors will begin pulling their money out of the US. At which point, the USD should theoretically fall 30% in trade-weighted terms, in order to condense the US trade deficit to a manageable amount.

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