The falling dollar hasn't prompted foreign investors to pull their money out of dollar-denominated assets, much to the surprise of some market watchers. But the future may not be so rosy.

For the time being, foreign investors are pouring big bucks into the U.S. Foreigners purchased $102 billion of agency and mortgage-backed debt in the first three months of the year and $247 billion of corporate bonds, according to data from Merrill Lynch. That's up from $43 billion and $164 billion, respectively, in the fourth quarter. In addition, private investors abroad bought some $59 billion in U.S. Treasuries in the first quarter, compared with $51 billion in the fourth quarter.

"As weak as the U.S. economy is, Europe is worse and Japan is worse yet," said Merrill's senior economist, Stan Shipley. "The U.S. still has the best long-term prospects."

At the end of March, foreigners owned about one-third of all Treasuries, 12% of agency debt and 21% of the corporate market, Merrill noted. Although nonresidents did sell U.S. equities to the tune of $8 billion in the first quarter, foreign ownership of stocks is still close to an all-time high of 11%. So it's not surprising that some analysts have expressed concern about the decline in the dollar this year. After all, a sagging dollar reduces the value of stocks and bonds to foreigners. If overseas investors expect the greenback to decline further, they might consider cashing out.

And a mass exodus of foreigners could be devastating because these investors are principally responsible for financing the current account deficit. The account deficit, which is the trade balance plus incoming and outgoing interest payments on foreign investments, grew to $142 billion in the first quarter, according to consensus estimates, up from $136.9 billion in the fourth quarter. The latest data are slated for release Thursday.

Future Woes

Some economists worry that another cut in interest rates by the Federal Reserve next week will undermine the dollar further and prompt investments to slow. Merrill's chief economist, David Rosenberg, said that while "foreign investor willingness to buy U.S. assets and securities so far has helped prevent the U.S. dollar's decline from becoming destabilizing for domestic financial markets, there is no guarantee that this will continue indefinitely."

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