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American investors move away from US assets
FT.com
By Jennifer Hughes in New York
Published: August 15 2005 18:36
Last updated: August 15 2005 23:33

American investors diversified away from the US at the fastest rate in 10 years, even as foreign buyers stepped up their purchases of US assets, data released on Monday suggested.

US investors bought $146bn of overseas bonds and equities in the past 12 months more than at any time since 1994.

But despite anxieties about the still-growing US current account deficit, overseas investors poured a net $71.2bn into US assets, up from a revised $55.8bn in May, according to the Treasury.

The capital flows, which more than covered the $58.5bn trade deficit for June, suggest that confidence in the strength of the US economy will be sufficient to sustain the external deficits.

The dollar rose to $1.236 from $1.239 against the euro on the news.

The US needs to attract more than $2bn in net inflows each working day to cover the current account gap, of which the capital and trade accounts are the most visible and biggest components.

"The bulk of the current account financing burden falls on securities rather than direct investment so we have to focus on this report,' said Sean Callow, senior currency strategist at Westpac Bank.

> >> >Tax take set to help shrink US deficit >> >> > The US budget deficit this year looks set to be around $60bn less than forecast earlier this year, with surging tax revenues helping to shrink the fiscal shortfall.

Go there > > US financial markets have paid particularly close attention to foreign appetite for US assets amid concerns that Asian central banks could be curbing their purchases of US bonds. Lower demand from overseas could push US borrowing costs sharply higher.

The inflows into the US were led in June by the corporate bond market. Foreigners bought a record net $52.2bn in corporate debt compared with a 12-month average of $27bn as bonds rallied strongly after credit market turmoil in May which had largely shut down the market for new borrowing.

But overseas investors remained wary of US stock markets. Foreigners bought a net $0.1bn of US stocks which took the three-month rolling average to just $1.7bn, the lowest in eight months.

"That they're buying bonds and not stocks has to be a bit of a concern,' said Mr Callow. "It suggests investors are happy to take fixed coupon payments on bonds but not convinced enough to bet on equity market appreciation.'

American investors' interest in overseas assets is the latest example of a growing trend. According to the Treasury, US investors bought $9.64bn of foreign equities, up from $4.7bn in May and taking the 12-month total to $96.2bn.

"It is partly because of the dollar, partly corporate scandals. Both have been a wake-up call to investors with too much exposure to US equities,' said Brian Garvey, strategist at State Street bank.

State Street's indicators have shown weak demand for US equities over recent weeks from both domestic and foreign buyers, even when good news has lifted stocks.

"This is one of the reasons we're still negative on the dollar,' added Mr Garvey.

? Separately, the Congressional Budget Office on Monday forecast the budget deficit will shrink to $331bn this fiscal year, down from a record $412bn last year, as tax revenues improve. Economists had forecast an even bigger deficit this year.

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