Print

Mail

wiki links

US trade deficit may hurt dollar

The US trade deficit, which failed to stem the dollar's ascent in recent months, may yet pose a threat, Citibank said.

The US economic revival that the largest currency bank expects in coming months may also expand the current account deficit for the world's largest economy. That gap may reach the point where it eclipses the amount of money foreigners are funneling back into US investments.

There "may not be enough capital inflow" to balance the current account deficit, and that may start to erode the dollar's value in about six months or so, said Bob Sinche, chief currency strategist at Citibank. Before then, signs of an economic rebound will likely help the currency continue to gain, Sinche said.

This week, the dollar rose 0.2 percent to US$0.8471 per euro, from 84.90 last Friday, and about 1 percent to ?126, from ?124.65 a week ago. It reached the highest since April 1986 earlier today against a pool of six major currencies, including the euro, yen and British pound.

The US reported a US$32.2 billion trade gap for April, meaning about US$1 billion per day is flowing into foreign hands.

The current account shortfall -- a wider measure as it includes investments -- was US$109.6 billion in the first quarter, and amounted to about 4.4 percent of gross domestic product last year, a record.

That gap may increase if the US grows more quickly than other major economies, leading the US to import more from other countries than they do from us.

The dollar's gain this week shows investors are factoring in a quicker US recovery relative to Europe and Japan, on the back of six Federal Reserve interest-rate reductions since the start of the year, say analysts.

The euro zone, in comparison, hasn't received a similar boost in terms of lower rates. The European Central Bank has cut borrowing costs only once this year, by a quarter-point in May.

Citibank research is already showing some waning in funds entering the US from abroad.

June marked the sixth month in seven that more money has flowed out of the US as part of mergers and acquisitions than has poured in, Citibank said. And foreign buying of US stocks and bonds has also slowed from earlier in the year, according to the bank's analysis.

International investors may begin to call into question the pace of the US economic recovery after a government report today showed a bigger-than-forecast drop in the labor force in June, said some analysts.

In the week ahead, a focus will be on US June retail sales figures, to be released Friday, to gauge if rising joblessness is taking a bite out of consumer spending. Expectations are for a 0.3 percent gain in retail sales.

The labor report shows "the risks are you see a pretty tepid recovery" in the US, said Jim McCormick, a currency strategist at JP Morgan Chase & Co.

Investors may not be able to count on much more in the way of rate cuts from major central banks, even as declining stock indexes in the US and other major economies show lingering concern about the outlook for corporate earnings, said McCormick.

The dollar may lose out in that environment, he said, as concern for the prospects of the major economies may lead to a scaling back of international investment.

"It's the change in the flow that matters," and that may hurt the dollar in the second half of 2001, as the US has benefited from the international flow of money, said McCormick at JP Morgan.
This story has been viewed 4074 times.