Capital Flows to U.S. Surge Despite Dollar Weakness

Fourth consecutive month of positive net flow

Foreign investment in U.S. bonds and other long term investments rose beyond expectations despite concerns over the weakness of the dollar, official data showed on Nov. 17.

Net long-term capital flows to the U.S. to $40.7 billion in September from a revised $34.2 billion the prior month, according to the Treasury International Capital Data (TIC) monthly report.

On the whole, foreigners bought $133.5 billion of U.S. securities in September, the most since October 2008, from a revised inflow of $25.3 billion in the previous month.

Private net purchases of Treasury bonds and notes rose to $25.7 billion in September from $14.8 billion the prior month, and net foreign official purchases rose to nearly $19 billion from $13.1 billion.

Britain, Japan and Canada were the biggest buyers of U.S. bonds for the month of September.

"This is the fourth consecutive month of positive net TIC flows and good news for the greenback," said Tu Packard, a senior economist at Moody's Economy.com. She said the Treasury data showed financial markets were on the road to recovery from the worst crisis in decades.

Investors usually flock to the U.S. dollar during financial and other troubles but the greenback took a hit in recent months on rising risk appetite and concerns over a ballooning U.S. government budget deficit.

China, in the forefront of criticism on dollar's weakness, also raised its Treasury bond holdings in September to $798.9 billion from $797.1 billion in August. China, top holder of U.S. debt, has consistently raised concerns about the mushrooming U.S. debt, for fear it could erode the value of the dollar and its Treasury holdings. The latest criticism came from China's chief banking regulator, who warned this week that persistently low U.S. interest rates and a declining dollar were seriously affecting asset prices and threatening the global economic recovery.

The new data indicates that the weak dollar has actually helped to boost foreign purchases of U.S. assets, said Kathy Lien of Global Forex Trading. The data showed there was greater demand for long term over short term securities, suggesting that investors "have grown more confident in the U.S. recovery and the financial markets," she said. "Despite all of their criticism, China remains a net buyer because they know by selling Treasuries in size, they have more to lose because they could drive bond prices and the U.S. dollar lower, particularly if the market latches onto their flow."

Copyright Agence France-Presse, 2009

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