US Current Account Deficit Larger Than Expected

The U.S. current account deficit (search) widened more than expected in the first quarter to a record $195.1 billion, driven by a growing merchandise trade gap and an increase in unilateral transfers, such as U.S. aid for tsunami victims, a government report showed on Friday.

The quarterly shortfall overshot Wall Street expectations for a $190.0 billion deficit. The Commerce Department (search) also raised the current account deficit for the fourth quarter of 2004 to $188.4 billion, from $187.9 billion previously.

The current account, the broadest measure of U.S. trade with the rest of the world as it includes investment flows, ran at a record 6.4 percent of gross domestic product (search) in the first quarter, the Commerce Department said. Economists generally consider that to be an unsustainably high level.

"Probably the main implication is that it does put some down pressure on the U.S. dollar. However, recently that pressure has been offset by the Fed's interest rate hikes, and that could continue," said Patrick Fearon, senior economist at A.G. Edwards & Sons in St. Louis.

The first-quarter decline in the current account reflected a goods deficit which increased to $186.3 billion, from $182.2 billion in the fourth quarter.

"It's old data, so people have known it would be pretty poor. Basically the current account deficit will improve dramatically in the second quarter as the we know the trade deficit has improved. There won't be too much lasting negative dollar impact," said Andre Busch, global foreign exchange strategist for Harris Nesbitt in Chicago.

Increases in U.S. government grants and in private remittances and other transfers boosted net outflows of unilateral transfers to $27.1 billion in the first quarter, from $22.4 billion in the fourth. The increase was driven in part by American relief efforts to help victims of the tsunami that hit Southeast Asia in December.

"Unilateral transfers is one of the things that stood out, which is folks sending money back to other countries, to relatives and some of it also is investments. Private remittances rose, but the biggest increase is in government grants, which is probably for the tsunami," said Mark Vitner, senior economist at Wachovia Securities in Charlotte, N.C.

Concerns about the U.S. current account have contributed to the dollar's three-year decline against the euro and a basket of major currencies. The dollar depreciated another 1 percent in the first quarter, the Commerce Department said.

That followed declines of 5 percent in the fourth quarter and 8 percent for 2004 as a whole on a trade-weighted basis against a group of seven major currencies.