In October, US President George W Bush signed the Homeland Investment Act into law, which may be happy tidings for the depressed dollar but certainly not for the investment promotion agencies around the world that expend so much energy chasing US investment dollars.

The act – part of the American Jobs Creation Act of 2004 and sponsored by both Democrats and Republicans – is designed to boost capital investment in the US by luring investment dollars from overseas back into the domestic market.

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It allows companies to repatriate funds that are in excess of the average foreign dividends over the past three of five years at a more favourable rate of 5.25% in either the first taxable year for the firm (FY2005) or the last taxable year (FY2004). This is compared with the usual rate of 35% – quite a big incentive for US multinationals to take more money back home and keep it there.

This should prove to be a boon to the dollar, which was a key motivation for the legislation in the first place. The logic is that encouraging companies to return profits to the US will fuel job market recovery and help to reduce the massive current account deficit, two factors that are acting as drags on the dollar at present.

Whether the act will have the desired effect on the US currency and domestic economy is debatable, but its effect on US outflows of FDI is bound to be detrimental. There are estimates that an additional $200bn-$400bn could be repatriated over the one-year period that the tax deduction is valid.

Obviously, whether a company decides to take advantage of the temporary tax break and repatriate funds will depend on whether it sees more attractive investment opportunities with higher return rates in the home market or overseas.

Either way, look for – at the very least – a dip in FDI outflows from the US in 2005.