UPDATE 1-US current account deficit smallest in nearly two years

Tue Dec 18, 2012 10:04am EST

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* Current account deficit narrows to $107.5 billion

* Smallest shortfall since fourth quarter of 2010

* As share of GDP, gap down to 2.7 percent from 3.0 percent

WASHINGTON, Dec 18 (Reuters) - The U.S. current account deficit shrank to its narrowest in nearly two years in the third quarter as weak domestic demand and lower oil prices curbed imports, a government report showed on Tuesday.

The Commerce Department said the current account gap, which measures the flow of goods, services and investments into and out of the country, fell to $107.5 billion, the lowest level since the fourth quarter of 2010, from $118.1 billion in the second quarter.

That represented 2.7 percent of gross domestic product, the smallest share since the second quarter of 2009, and down from 3.0 percent in the second quarter.

The smaller deficit, if sustained, should help support the dollar, even as the Federal Reserve continues its aggressive easing policy to boost economic growth.

"With imports falling further in October, look for the current account gap to decrease again in the fourth quarter," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

"Next year, faster growth in emerging markets should support exports, extending the improvement in the trade balance. A gradually shrinking current account deficit means the U.S. is becoming less dependent on foreign funding, which should be a long-term positive for the greenback."

Economists polled by Reuters expected the third-quarter current account gap to narrow to $103.4 billion from a previously reported $117.4 billion.

The shortfall on the current account has shrunk from a peak of 6.5 percent of GDP in the fourth quarter of 2005, in part because of a significant increase in the volume of oil exports.

In the third quarter, the deficit on goods tumbled to $173.9 billion from $185.7 billion in the prior quarter, while the services surplus rose to $49.4 billion from $48.3 billion.

The surplus on income decreased to $50.8 billion from $52.1 billion in the second quarter, putting a wrinkle on the report. The drop reflected an increase in dividend payments abroad.

But foreign investment in the United States rebounded $282.0 billion after decreasing $143.6 billion in the second quarter. There was also an increase in purchases of U.S. Treasuries and shares during the quarter.

"The third quarter also saw a marked increase in investment into U.S. currency and U.S. Treasury securities, likely a function of the increased uncertainty seen in the markets during the period," said TD Securities' Gennadiy Goldberg.

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