February data from the government’s Treasury International Capital (TIC) reporting system—which tracks capital flows into and out of the United States—provided another strong signal that the nascent economic recovery is quickly turning into a full-blown expansion.
The investments are another strong signal that the nascent recovery is quickly turning into a full-blown expansion.
Given the divergence in the economic growth path between the United States and its major trading partners, policymakers and investors should anticipate a healthy flow of dollars into the U.S. economy this year.
Although net foreign purchases of U.S. long-term securities have to break above the multiyear downtrend, they have increased on average over the past seven months. We expect the breakthrough to occur in late spring, once we get beyond the negative net purchases of last March and April during the economic shutdown.
Not only would increasing demand for U.S. securities imply growing confidence in the U.S. economy, but it would also add to the downward pressure on U.S. long-term interest rates. That would make the Fed’s efforts to reduce the cost of investment that much easier, adding to the recovery.
A strengthening economy would also be expected to add to foreign direct investment in the United States, adding to the demand for the dollar.
The dollar is roughly 5% lower than its average value during the free-floating exchange rate era and is fair valued at the moment versus the euro, pound and Canadian dollar—the major investors in the United States in 2019.
An increase in the dollar’s value would increase the return on foreign direct investments as well as the total return on foreign portfolio investments in securities.
(Note: Foreign direct investment is available only through the third quarter of 2020 at the moment, and it suggests only a partial recovery after crashing during the pandemic.)
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
