2006 Current Account Deficit Could Exceed $900 Billion

So far this year, the U.S. current account deficit is 15% higher than it was last year. If it continues at this pace, it will be more than $900 billion, the largest deficit on record. This will have a negative effect on the dollar, pushing the value of the dollar lower compared to the yen, Euro and other foreign currencies.

The Bureau of Economic Analysis (BEA) reported that the Q3 current account deficit was $225 billion, which showed that the deficit only increased 3% from the prior quarter. However, when the first three quarters are added together, and compared to the same time period in 2005, it shows that the U.S. deficit grew 15%. If this trend continues, then the total deficit will be $900 billion, 15% over last year’s deficit of $791 billion.

This large number will definitely cause foreign investors to worry about the value of the dollar, which could cause the dollar to decline. This will increase the cost of imports, which will further aggravate the deficit, unless demand for imported goods declines. A dollar decline could trigger inflation, since import prices will continue to rise.

Source: BEA, “U.S. International Transactions: Third Quarter 2006”, December 18, 2006.