Sept. 18 (Bloomberg) -- The U.S. current-account deficit widened more than forecast last quarter to the second-largest on record as the trade gap expanded and the Treasury paid more interest to overseas investors.

The $218.4 billion shortfall in the current account, the broadest measure of trade because it includes transfer payments and investment income, followed a revised $213.2 billion first- quarter gap, the Commerce Department said today in Washington. The Treasury Department said in a separate report that purchases of U.S. securities by international investors slowed in July.

The growing deficit poses a risk to the economy should investors sour on U.S. assets and diversify to other countries because it may weaken the dollar and push interest rates higher. Growing economies abroad and declining costs of imported energy may help stabilize the deficit and keep that from happening.

``Barring a growth miracle outside the U.S., the current account deficit seems destined to remain quite large,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. ``In spite of gloom-and-doom scenarios that have been voiced for years, the U.S. has had no problems attracting the foreign capital needed.''

Slower economic growth in the U.S., due in part to a weaker housing market, may keep the deficit from widening much more. Confidence among homebuilders declined this month to a 15-year low as sales and profits dropped, a report showed today. The National Association of Home Builders/Wells Fargo index of builder optimism fell to 30 during the month from 33 in August.

CEO Optimism Wanes

Optimism among American chief executives also decreased, according to a survey released today by the Business Roundtable. The group's economic outlook index fell to a three-year low of 82.4 this quarter from 98.6. Readings above 50 signal growth.

The U.S. needs to attract about $2.4 billion a day to fund the gap, and any shortfall would undermine the value of the dollar. The gap amounted to 6.6 percent of the economy, the same as in the first quarter. It was a record 7 percent of gross domestic product in the final three months of 2005.

Overseas investors, who bought a net $10.1 billion of U.S. Treasury securities last quarter, may recover their appetite for U.S. assets as the Treasury market rallies, analysts said. Foreigners bought a net $6.6 billion in Treasury bonds and notes in July, down from $27 billion in June, the department reported.

Net purchases of Treasury notes, corporate bonds, stocks and other financial assets rose $32.9 billion, down from June's $75.1 billion and the smallest gain since May 2005. Treasury notes have since advanced, spurred by the Federal Reserve's decision to end a two-year run of interest-rate increases in August.

`Scary Looking'

``It's quite a scary looking number on the surface,'' said Neil Jones, head of European hedge fund sales at Mizuho Financial Group Inc. in London. At the same time, ``investors and speculators are looking for Japanese investors to move back into dollar assets.''

The dollar fell against the euro, while rising versus the yen. The yield on the 10-year Treasury note rose about 2 basis points to 4.81 percent at 4:45 p.m. in New York.

Economists forecast a second-quarter current-account deficit of $213 billion, according to the median estimate in a Bloomberg News survey, after an initially reported $208.7 billion shortfall the previous quarter.

The deficit in trade, which accounted for most of the total current-account imbalance, widened to $193.8 billion last quarter from $191.1 billion in the first quarter.

U.S. Investors

U.S. investors received less income on their holdings of overseas investments than foreigners received here. That helped to widen the overall current-account deficit.

Income on overseas assets held by U.S. investors rose to $154.2 billion from $140 billion. Foreign earnings on U.S. assets, including wages and other compensation, increased to $158.3 billion in the second quarter from $142.5 billion in the previous three months. That left a record $4.1 billion deficit on income payments, compared with a $2.5 billion shortfall in the first quarter.

``There's an income drain to the economy as we pay more to foreigners than we're getting back,'' said Edward McKelvey, senior U.S. economist at Goldman Sachs Group Inc. in New York, who forecast a $218 billion shortfall for the quarter. ``The total gap will stabilize but the income drain will continue.''

U.S. government payments to foreigners and other private transfers abroad registered a $20.4 billion deficit, compared with the $19.5 billion deficit in the prior quarter.

Trade Balance

The figures so far this quarter suggest the trade balance may continue to deteriorate. The gap widened in July to a record $68 billion as imports reached an all-time high. Record oil prices, which have since receded, also boosted the July trade deficit.

The trade gap with China stayed near a record, spurring calls among some U.S. lawmakers for higher tariffs on the Asian nation for currency policies that they say unfairly assist Chinese exports. Senators Charles Schumer of New York and Lindsey Graham of South Carolina last week requested a vote before the end of this month on their measure to impose a 27.5 percent duty on Chinese imports.

The two senators said in a statement that they will demand a vote unless China makes a ``significant move very soon'' to raise the value of its currency, which they argue is as much as 40 percent undervalued, reducing the cost of Chinese goods in world markets and giving Chinese exports an unfair advantage.

Economists expect the U.S. trade deficit to stabilize in coming quarters, helped by a weaker dollar and global growth that will buttress demand for U.S. exports. The dollar has declined about 2.7 percent this year against a basket of currencies of major trading partners.

`Slowdown Continuing'

``We are going to see a little bit of slowdown continuing'' in the economy, said Terry McGraw, chief executive officer of McGraw-Hill Cos., the second-largest U.S. educational publisher, in an Sept. 14 interview.

A U.S. economy that's still growing faster than many of its trading partners suggests any improvement will be gradual. The Japanese economy expanded 2.5 percent in the second quarter from the same three months in 2005, compared with 3.6 percent growth in the U.S. during the same 12 months. In Germany, the economy grew 2.4 percent last quarter from a year earlier.

The International Monetary Fund this week warned that the possibility of a ``disorderly'' drop in the value of the dollar is the biggest risk to world financial markets. The IMF also said the U.S. current account deficit needs to narrow.

``A low-probability but potentially high-cost risk to the global financial system is that a dollar decline could become self-reinforcing and hence disorderly,'' the IMF said in its Global Financial Stability Report.

To contact the reporter on this story: Joe Richter in Washington Jrichter1@bloomberg.net

Last Updated: September 18, 2006 16:50 EDT