Foreign demand for long-term U.S. financial assets jumped sharply in November, rising to the highest level in more than two years even though China's holdings of Treasury securities fell.
Continued strong demand for U.S. debt is critical to financing America's soaring budget deficits and keeping domestic interest rates low enough to support a sustained economic recovery.
The Treasury Department said Tuesday that foreigners purchased $126.8 billion more in assets than they sold in November, the largest gain since an increase of $128.9 billion in October 2007.
China, the largest holder of U.S. Treasury securities, trimmed its holdings by $9.3 billion in November, pushing them down to $789.6 billion, the smallest level since last June.
Japan, the second largest owner of U.S. Treasuries, boosted its holdings in November by $11.4 billion to $757.3 billion. U.S. Treasuries held by Britain were also up, rising to $277.5 billion, while the holdings of Russia climbed to $128.1 billion. Holdings of U.S. Treasuries by Brazil and Hong Kong also rose but the holdings of oil exporting countries fell slightly in November.
China's holdings are a result of the huge trade deficits the United States runs with China. The Chinese take the dollars Americans pay for Chinese products and invest them in Treasury securities and other dollar-denominated assets.
American manufacturers argue that China's huge dollar reserves reflect a strategy by the Chinese government to keep its currency artificially low against the dollar as a way to boost Chinese exports and dampen demand in China for American products. A stronger dollar compared to the yuan makes Chinese goods cheaper in the United States and U.S. products more expensive in China.
On a visit to China in November, President Barack Obama urged the Chinese government to allow its currency to rise in value against the dollar while Chinese officials continued to express concerns about the soaring U.S. budget deficit.
The U.S. deficit hit an all-time high of $1.42 trillion for the 2009 budget year and the administration in its August budget review projected the deficit would climb even higher to $1.5 trillion this year.
The administration has said it is important to spend heavily to attack the worst recession since the 1930s but officials have said that Obama will make deficit reduction a key priority once the recovery has gained momentum.