While the US twin deficits have soared over the past few years, many currency traders have remained bullish on the USD. Their reasoning is that as long as foreigners remain willing to finance this deficit (by purchasing dollar-denominated assets), the USD should remain stable. However, while 2005 was a record year for capital inflows, there was an interesting trend that could spell trouble for the dollar if it continues. It seems a majority of capital inflows are now contributed by private, rather than public entities, leading many analysts to speculate Central Banks are slowing their purchases of USD. However, there is a glitch in the data, in that if a public entity buys USD through a private investment bank, then the transaction is recorded as private. The Business Online reports:

But regardless of how much of the cash is from governments and how much from private sources, one simple fact is clear: in the absence of a major shock, the dollar will continue to be supported by foreign capital.

Read More: Private vs Official Dollar Purchases