Trade Weighted dollar exchange International Reserves(USD bn) Rate 1992=100 USDbn Capit al Account Countries Trade Account Countries Trade Account count ries 160 100 Source: DB Global markets Source: DB Global markets Research. bea Research. beA Differing motivations for Financing the us current Account Deficit The US current account deficit(now about $500 bn, 4.7% of GDP)has been financed by official inflows from the trade account region and private inflows_ from the capital account region. This has been especially so for the last 5 years, with the US current account deficit surging from $130 billion in 1997to S300 billion in 1999 to $400 billion in both 2000 and 2001. This US current account growth has been the engine for growth for the rest of the world Asian countries in particular( China, Taiwan, HK, Singapore, Japan, Korea, Malaysia)manage their dollar exchange rates; and, as such, they float against the capital account region. Official capital exports finance growth-oriented trade surpluses. Policy is often affected through a system of exchange controls and administrative pricing. Some currencies are explicitly and rigidly fixed (rMB, HKD, MYr); others PY, RW)float but still accumulate vast amounts of official reserves in USD Since mid-1998. the JPY has moved from 120 to 105 to 135 and now back around 116. This has coincided with increases of Japan's foreign exchange reserves of $92 billion in the last year alone(vS overall capital exports of $116 billion)and of $275 billion since 1998. China accumulated reserves of $56 billion in 2001 and $74 billion in 2002. Taiwan accumulated reserves of $16 billion in 2001 and $40 billion in 200 These three official sectors alone financed 42% of the $489 billion uS current account deficit in 2002. In Asia as a whole, a single-minded emphasis on export growth has been supported by a virtually unlimited demand for US financial assets in the form of official reserves. The current account surplus of Asia in 2002 was about $200 billion. The increase in reserves was a bit over $200 billion Europe and, for now, Latin America constitute the bulk of the capital account region. European flows have been driven by private sector calculations for more than ten years. Private Latin American investors are now reversing capital flight, and their currencies have also been appreciating dramatically recently Improving economic conditions in Latin America have clearly pulled funds into the region and limitedTrade Weighted Dollar Exchange Rates International Reserves (USD bn) 80 100 120 140 160 180 1992 1994 1996 1998 2000 2002 Capital Account Countries Trade Account Countries 1992=100 0 200 400 600 800 1000 1200 1400 1992 1994 1996 1998 2000 2002 Capital Account Countries Trade Account Countries USDbn Source: DB Global Markets Research, BEA Source: DB Global Markets Research, BEA Differing Motivations for Financing the US Current Account Deficit The US current account deficit (now about $500 bn, 4.7% of GDP) has been financed by official inflows from the trade account region and private inflows from the capital account region. This has been especially so for the last 5 years, with the US current account deficit surging from $130 billion in 1997 to $300 billion in 1999 to $400 billion in both 2000 and 2001. This US current account growth has been the engine for growth for the rest of the world. Asian countries in particular (China, Taiwan, HK, Singapore, Japan, Korea, Malaysia) manage their dollar exchange rates; and, as such, they float against the capital account region. Official capital exports finance growth-oriented trade surpluses. Policy is often affected through a system of exchange controls and administrative pricing. Some currencies are explicitly and rigidly fixed (RMB, HKD, MYR); others (JPY, KRW) “float” but still accumulate vast amounts of official reserves in USD. Since mid-1998, the JPY has moved from 120 to 105 to 135 and now back around 116. This has coincided with increases of Japan’s foreign exchange reserves of $92 billion in the last year alone (vs. overall capital exports of $116 billion) and of $275 billion since 1998. China accumulated reserves of $56 billion in 2001 and $74 billion in 2002. Taiwan accumulated reserves of $16 billion in 2001 and $40 billion in 2002. These three official sectors alone financed 42% of the $489 billion US current account deficit in 2002. In Asia as a whole, a single-minded emphasis on export growth has been supported by a virtually unlimited demand for US financial assets in the form of official reserves. The current account surplus of Asia in 2002 was about $200 billion. The increase in reserves was a bit over $200 billion. Europe and, for now, Latin America constitute the bulk of the capital account region. European flows have been driven by private sector calculations for more than ten years. Private Latin American investors are now reversing capital flight, and their currencies have also been appreciating dramatically recently. Improving economic conditions in Latin America have clearly pulled funds into the region and limited