Number: RS21934
Title: International Capital Flows Following the September 11 Attacks: An Update
Authors: James K. Jackson, Foreign Affairs, Defense, and Trade Division 
Abstract: The 2001 terrorist attacks raised concerns that foreigners would curtail their purchases of U.S. financial assets, thereby weakening the value of the dollar. The Federal Reserve responded aggressively on its own and in tandem with other central banks to supply liquidity and to take other actions in order to avert a potential crisis in the markets. These efforts were largely successful: by year-end 2001 U.S. equity markets slowly recovered their pre-attack values, and the exchange rate value of the dollar returned to its pre-attack rate after fluctuating within a fairly narrow range. A slower rate of economic growth in 2001 and 2002 reduced capital inflows to the United States and likely contributed markedly to the decline in the dollar in 2002 and 2003. By the first quarter of 2004, the exchange value of the dollar appeared to have stabilized somewhat, even if only temporarily. During the first quarter of 2004, an improved profit position in the United States among foreign-owned firms spurred those firms as a whole to repatriate a larger share of their income back home, and both U.S. and foreign-owned banks lent a record amount of funds to banks abroad in response to an increase in foreign demand for credit. Congress affects issues related to U.S. capital flows as a result of its direct role in fiscal policy and its indirect role in monetary policy and through the impact capital flows have on the dollars exchange rate and on the U.S. trade balance.
Pages: 6
Date: September 13, 2004