Current account gap shrinks, housing woes persist

NEW YORK (Reuters) - Sentiment toward the U.S. housing sector remained poor in December and a regional factory index showed weakness, while other data on Monday suggested the dollar's shrinking value had boosted trade and capital inflows in recent months.

The U.S. current account deficit shrank in the third quarter to its narrowest in two years, while net overall capital inflows into the country surged in October, separate reports showed. The dollar's decline on worries about the economic outlook provided a boost to exports while enticing foreign buyers to U.S. bonds and stocks.

Analysts cautioned against reading too much into one month's capital inflows data or the surprisingly sharp narrowing in the U.S. account deficit.

"Capital inflows into the U.S. surged in October, but cyclical downside and persistent credit concerns suggest the October print was a flash in the pan and not the start of a new trend," said Gabriel de Kock, currency economist at Citigroup Global Markets in New York.

"The U.S. external deficit remains large and longer-term trends in capital flows suggest that foreign private investors are becoming less willing to fund the U.S. deficit," he added.

The dollar's decline accelerated in August as a severe tightening in credit raised expectations the Federal Reserve would cut interest rates to keep the economy from slowing dramatically as a slump in housing spread to other sectors of the economy.

The Fed has cut its key interest rate 1 full percentage point since mid-September and taken other steps to add liquidity to markets.

Data on Monday showed the housing sector remained a major source of stress for the economy, with the home builder sentiment index holding at a record low for a third consecutive month in December. The index has been hampered by problems in the mortgage market and a huge supply of unsold houses.

The National Association of Home Builders said its preliminary NAHB/Wells Fargo Housing Market Index was unchanged at 19 in December, remaining at its lowest reading since the gauge started in January 1985.

"The index remains at an all-time low and there is little else to suggest that the housing market is stabilizing," said Brian Dolan, chief FX strategist at Forex.com in Bedminster, New Jersey.

"The NAHB future expectations improved to 26 from 24, but prospective buyer traffic continued to decline," he added.

In manufacturing, activity in New York State factories, declined sharply in December to a seven-month low, consistent with the view that the U.S. economy is slowing down.

The dollar gained against the euro following the current account and capital inflows data, while U.S. Treasuries rose in response to the weak manufacturing and housing figures.

U.S. stocks, meanwhile, posted steep losses on continued worries about the housing slump's impact on the broader economy.

STRONG EXPORTS

The Commerce Department said the U.S. current account deficit contracted in the third quarter to $178.5 billion from $188.9 billion in the second quarter. Stronger U.S. exports and a rise in income earned on U.S.-assets held abroad helped trim the deficit to its lowest since third-quarter 2005, when it was $173.4 billion.

October's inflows of $97.8 billion in October from a revised $32.8 billion outflow in September were more than sufficient to cover the month's U.S. trade deficit of $57.8 billion. Economists worry that if the United States were unable to attract foreign capital to cover its external funding, the dollar could collapse.

On a down note, the New York Fed's "Empire State" index of general business conditions fell to 10.31 in December from 27.37 in November. That was the lowest reading since May and below the 20.00 forecast by economists polled by Reuters.

"This report contrasts with relatively strong data out in the past several days and highlights the risks to the economy going forward as financial intermediation becomes interrupted by losses emanating from the subprime mortgage crisis," said T.J. Marta, fixed income strategist at RBC Capital Markets in New York.

(Additional reporting by Julie Haviv, Chris Reese and Doug Palmer, Editing by Andrea Ricci)