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U.S. Investors Step Up Overseas Buying In December

The United States reported a net overall capital outflow of $11 billion in December, the
first outflow in nearly two years, the U.S. Treasury Department said.

It was the first outflow since June 2005 and a reversal of the $70.5 billion inflow reported in November.

The outflow covers none of the U.S. trade deficit in December, which widened to $61.18 billion. The trade deficit accounts for around 90% of the current account deficit.

"As far as the prolonged impact on the dollar, this could be temporary," said Ashraf Laidi, chief currency strategist at CMC Markets. "But any way you look at it, this was quite unexpected."

Following the report, the dollar fell to a six-week low against a basket of major currencies on Thursday.

Net long-term capital inflows, cross-border investment into securities with an original maturity of 12 months or longer, fell to $15.6 billion from a $84.9 billion inflow in November. November's number was upwardly revised from $68.4 billion.

Camilla Sutton, currency strategist, at Scotia Capital emphasized most of the decline in purchases came from the private side, although official buying was still evident.

Private net purchases of U.S. securities totaled $39 billion in December, down from $115.7 billion in November. Official net buying totaled $24 billion, up from $6.5 billion.

Japan Buys

Net purchases of U.S. Treasuries added up to $10.58 billion, below November's $34.12 billion. It was the smallest purchase of U.S. Treasuries since September's $1.66 billion.

Japan, the largest holder of U.S. Treasury securities, was a buyer of government bonds in December. It held $644.3 billion in securities, up from $637.4 billion in November. Meanwhile,
China, the second largest holder, held a total of $349.6 billion of Treasuries in December, up from $346.5 billion in the prior month.

Net purchases of corporate bonds fell to $35.98 billion in December from $65.4 billion in November, while U.S. equities experienced net outflows of $11.6 billion compared with a $6.9
billion inflow in November.

U.S. residents purchased a record net $47.4 billion of foreign securities in December, beating the previous record of $37.4 billion in November 2006.

Elsewhere, purchases of agency bonds by foreign official sources in December was at a historical high at $15.5 billion. The previous category high was $11.9 billion in July 2006.

The United States reported net overall capital inflows of $827.9 billion in 2006 compared with $667.9 billion in 2005.

The dollar is sensitive to foreign demand for U.S. assets because increasing amounts of foreign capital are needed to finance the country's external deficit.

"One number doesn't make a trend ... but it's going to totally heighten expectations for the next figure," said Tim Mazanec, senior currency strategist at Investors Bank & Trust
in Boston. "If it comes out $120 billion, people would see that as a one-off but we get back-to-back $15 billion, you don't want be long the buck."

A senior Treasury official in Washington cautioned investors not to read too much into December's abrupt outflow.

"The data is enormously volatile from month to month and the best thing is to look at it over a much longer time horizon," he said. "The U.S. Treasury market is the deepest, most liquid and most vibrant in the world," he said, adding that it continues to attract investment from a wide variety of sources."