May 15 (Bloomberg) -- International investors slowed purchases of U.S. securities in March as foreign central banks were net sellers of Treasury notes for the first time in six months.

Net holdings of Treasury notes, corporate bonds, stocks and other financial assets increased by $69.8 billion, less than February's revised $90.5 billion, the Treasury Department said in Washington today. Investment was sufficient to cover March's U.S. trade deficit of $62 billion.

The slower rate of accumulation comes as investors expect the interest-rate gap between the U.S. and Europe and Japan will shrink, while central banks diversify reserves. The slide in the dollar this year may also deter some investors in coming months, said currency strategists.

``Foreign investors have less and less interest in U.S. securities, which is a big problem for the dollar,'' said Toshi Honda, a currency strategist in London at Mizuho Corporate Bank. ``Today's numbers are not going to stop the current trend of the declining dollar.''

In the last two months, Sweden's Riksbank almost halved its dollar reserves and banks in Kuwait, Qatar and United Arab Emirates said they were increasing euro holdings. Norway cut its holding of Treasuries by 81 percent to $8.5 billion in March. Russia's finance minister complained about the dollar's ``instability.''

Japan, the largest foreign owner of U.S. government debt, sold a net $18.2 billion in Treasuries in March, leaving it with total holdings of $640.1 billion.

Global Scene

The European Central Bank is lifting borrowing costs in response to faster growth just as the Federal Reserve considers a pause in its cycle of rate increases. The Bank of Japan said in March it planned to end five years of interest rates at zero percent.

``Japanese investors, after having ridden the dollar uptrend about as far as it could go, have shed some U.S. assets,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``This turned out to be good timing as the dollar fell further in April.''

The dollar is down 6 percent against a basket of currencies this year after rallying 12.7 percent in 2005. Most of the drop has occurred since the start of April.

``This decline is something that all of us are concerned about,'' said Sherry Cooper, chief economist at BMO Nesbitt Burns in Toronto. ``If March was weak, imagine what April and May could turn out to be.''

Trade Shortfall

The overall gain in purchases by foreigners was enough to cover March's $62 billion U.S. trade deficit and compares with an average of about $57 billion in the past five years.

Analysts expected inflows of $79.9 billion, the median of five estimates in a survey by Bloomberg. International purchases of U.S. securities peaked at $106.4 billion in October.

Purchases of Treasury securities rose a net $3.07 billion, down from $21.9 billion in February. Foreign central banks cut their holdings by $6.3 billion.

Demand for agency debt increased by a net $19 billion.

OPEC, Britain

The U.K., China and the Organization of Petroleum Exporting Countries all increased their holdings of Treasury securities in March, led by a $16.8 billion increase for the U.K. Caribbean banking centers, which some analysts tie to hedge funds, boosted their Treasury holdings by $7.3 billion.

The net figure in today's report comprises Treasury notes and bonds; debt of so-called agencies such as Fannie Mae and Freddie Mac; corporate bonds and stocks; and the stocks and bonds of foreign companies bought from U.S. investors. The report is one measure of U.S. capital flows and doesn't include foreign direct investment and bank deposits.

Foreigners' holdings of U.S. stocks rose by $19 billion. The Standard & Poor's 500 rose by less than 1 percent in March and is up 4 percent so far this year.

Corporate bond holdings rose $48.1 billion.

``Private investors are stepping in to cover official buyers,'' said Stephen Malyon, an economist at Scotia Capital Markets in Toronto. Still, if the lower overall number continues into April, ``that would be troubling,'' he said.

The U.S. economy will grow at a 3.5 percent annual rate from April through June, according to the median forecast of 81 economists in a Bloomberg survey.

Economists boosted their median estimate for first-quarter growth to an annual rate of 5.8 percent, from a previously reported 4.8 percent, after the U.S. trade deficit unexpectedly narrowed in March and exports climbed to a record.

Interest Rates

U.S. interest rates are still the highest among the Group of Seven major industrial countries. The Fed raised its benchmark rate to 4.75 percent in March, then boosted it again to 5 percent last week, a half-point higher than the Bank of England.

The Bank of Canada's main rate is 4 percent, the European Central Bank's key rate stands at 2.5 percent and the Bank of Japan's benchmark is near zero, where it has been since 2001.

The U.S. needs foreign capital to fund its current-account deficit, the broadest measure of trade because it includes investment income and transfers. The deficit rose to a record $804.9 billion, or 6.5 percent of gross domestic product, last year, the Commerce department said.

China bought a net $1.6 billion in U.S. debt in March and holds $321.4 billion.

U.K. holdings, which some analysts say include investments from Middle East oil economies recycled through British banks, rose in March by $16.8 billion and total $171.5 billion.

To contact the reporter on this story: Alison Fitzgerald in Washington at Afitzgerald2@bloomberg.net

Last Updated: May 15, 2006 16:05 EDT