The dollar weakened, especially against the euro, after the US Treasury reported on March 15 that net capital inflows into the country fell short of the trade deficit for the second straight month in January. The report put worries about financing the growing US current account deficit back on the front burner. It came a day after the Commerce Department reported that the current account deficit widened more than expected in the fourth quarter to a record $225 billion, or 7% of gross domestic product. For all of 2005 the current account deficit grew to a record $805 billion for the ninth annual record in the past 10 years.
The Treasury report showed that US net portfolio investment totaled $66 billion in January, which fell short of the January US trade deficit of $68.5 billion. Foreigners bought a net $4.4 billion of US treasury bonds in January, the lowest since February 2003 and down from $18.3 billion in December 2005 and a record $54.5 billion in November. US bond prices fell and yields rose on the news.
Some economists worry that mounting US budget and trade deficits could send the dollar into a steep decline. They warn that the US economy has become too dependent on foreign investors who provide much of the money the government borrows to cover its deficits. Others say that while the twin deficits are unsustainable in the long term, the trade deficit is a sign that the US economy is strong and that American consumers still have money to spend on imports.