In May 2003 the US dollar fell 4.6% against other major currencies and oil prices dropped to their lowest levels since July 2002. Nonetheless, the US trade deficit shot up to its third highest tally ever: -$41.84bn. 38% of the trade deficit is accounted for by the deflation-struck countries of East Asia (Japan, China and the four East Asian NICs), forming a convenient vector for the export of deflation to the US. If Germany falls into deflation this year, the massive trade deficit with the euro area (which constitutes another 13% of the overall deficit) will only aggravate the situation.
So far the January-May 2003 trade balance stands at -$205bn. Amazingly this is 29% above the same period last year. And don't forget, 2002 set an all-time US current account deficit record, which the US is on track to utterly shatter this year. It's safe to say that the US current account deficit for 2003 could easily reach -$575bn, and 6% of US GDP is not out of the question.
The global economy is weak and only getting weaker, particularly with word out that Japan is still a wreck (as if anyone really believed the recovery stories last week!) and Germany is pressing for currency depreciation to rescue it from recession. There is simply nothing short of a major recession in the US which can pare back this dangerous current account deficit spiral. The distinct possibility is that the spiral will itself provoke the recession, tanking the dollar and spreading deflation throughout Europe.