Among the main developments:
- The adjustment in the external imbalances of the United States, Japan and Germany evident earlier in 1988 appears to have stalled in the fourth quarter. Although the US current account deficit improved in nominal terms in the second half of the year, export volume growth slowed while import volumes picked up: and the latest monthly data for Japan and Germany suggest that their trade surpluses are rising again.
- On capital account, there was a substantial rise in direct investment flows to the United States in 1988, while there were sizable outflows from Japan, Germany and the United Kingdom among others. Increased acquisition and merger activity, prompted in part by the desire to reduce costs and exchange risks by locating some production abroad and by a wish to surmount potential trade barriers, is seen as the principal motive behind the increased direct investment flows.
- Activity in the international capital markets was sharply higher in the first quarter, with a substantial increase in issuance of equity-related bonds by Japanese borrowers the most important contributory factor: by contrast, announcements of new euronote facilities fell for the second consecutive quarter.
- In the foreign exchange markets, the dollar improved steadily throughout the first quarter of 1989 as economic statistics continued to indicate that the US economy was growing strongly; over the period as a whole, the dollar appreciated by more than 5% in effective terms.
International financial developments