Overblown fears?

Digging into economic data suggests the big bugaboo in the foreign exchange market — the large U.S. current account deficit — is not so scary.

America’s commercial empire is based on a foreign direct investment strategy, which entails servicing foreign demand primarily through building and selling locally. When an ownership-based framework is used instead of the movement of goods over national boundaries, the U.S. current account deficit is close to levels thought to be sustainable. In addition, given the establishment of supply chains across the globe, intra firm trade is significant and accounts for almost half of the U.S. trade deficit as conventionally measured. This intra-firm trade may be less sensitive to currency fluctuations and may not require the kind of financing that is often associated with a trade deficit.

Lastly, it appears that foreign investors remain willing and able to finance the U.S. current account deficit.

Currency traders: Beware of deducing currency movement from the U.S. current account position. The dollar has experienced long periods of both appreciation and depreciation while the country has recorded large trade deficits. There is no substitute for prudent financial and risk management.