Instant Insight: Gap in Current Account Could Cap Dollar Rally - Forex Market

Saturday, 18 June 2005 GMT - Written by Boris Schlossberg, Currency Strategist

The Current Account deficit hit a record -$195.1 Billion in the first quarter of 2005 spurred by demand for higher priced oil and consumer goods from abroad. The deficit is now running at a rate of 6.4% of GDP - a pace that requires an infusion of $2.1 Billion of foreign capital per day.
Combined the disappointing TIC data reported on Wednesday which printed at only $47.4 Billion versus expectations of $57 Billion, the weak Current Account results are likely to weigh on the dollar and contain any further rally. With oil prices continuing to trade above $55/bbl and the dollar fully 10% higher against the euro since the beginning of the year, it is plausible to imagine the Current Account deficit ballooning to -$200 Billion level for the first time in history in Q2 of 2005.

The dollar’s recent rally has been the direct result of euro weakness caused by European political and economic problems while for the past two months the FX market appeared to forget the persistent deficit woes of the United States. Today’s larger than expected gap in the Current Account may reawaken those concerns once more and trigger a retrace in greenback’s recent rally.