Bloomberg News

WASHINGTON - The U.S. deficit in trading of goods, services, and investments widened to a record $106.1 billion in the second quarter, as imports grew faster than exports and overseas investors earned more on their U.S. holdings, the government reported Wednesday.

The current account deficit, the broadest measure of international trade because it includes financial transactions, grew from a revised $101.5 billion in the first quarter, the Commerce Department said.

Federal Reserve policymakers have been warning that the deficit's widening as a percentage of gross domestic product eventually could hurt confidence in the U.S. dollar if investors question the country's ability to meet its obligations. This would also add to inflation risks, they have said.

"As foreigners want to hold ever-increasing quantities of American investments, the deficit can be sustained," said Michael Moskow, president of the Federal Reserve Bank of Chicago, in a speech Tuesday. "But surely there must be a limit to the amount of the world's savings our economy can claim."

The current account deficit equals the money the United States must borrow overseas because U.S. savings are insufficient to pay for all the goods and services Americans import or to finance all domestic investment. On track to exceed $400 billion this year, the deficit's size would be "unprecedented" in Mr. Moskow's words - more than 4% of the $9.9 trillion gross domestic product.

And a resulting inflationary drop in the dollar could lead Fed policymakers to raise interest rates, Mr. Moskow said. "If this scenario emerged," he said, "the Fed would have to take this into account in determining the appropriate action pursuant to our policy of maximizing sustainable growth through price stability."

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