Is the trade deficit finally catching up with the dollar?
By now you've all heard the September 2006 US trade figures: a $64.3bn deficit, nearly 7% smaller than that of August and the smallest tally since April. Still, the 13 largest monthly trade deficits of all time have occurred during the last 13 months -- but perhaps we should concentrate on the positive.
Rather than talk about petroleum vs. non-petroleum imports or the deficit with China, I'd like to highlight something different. The United States has been running a trade deficit in the 5-6% of GDP range and a balance of payments deficit in the 6-7% of GDP range for two years now with little to no impact on the value of the dollar. Despite the tremendous downward pressure on the USD from these deficits, the ol' greenback (well, at least the $1 bill is still green) has declined nary a whit. Over the past 22 months (December 2004 to October 2006) the broad dollar index is actually up 2% in real terms and the major currencies index is up an incredible 7% in real terms.
But perhaps now, finally, this is starting to turn around.
Through the 8th of this month, the real dollar in November as measured by the broad dollar index is at its lowest point since December 2004, and current trends are likely to push it to its lowest point since October 1997. The dollar has a lot further to fall on the real major currencies index, but a further 5% slide would take the dollar per this measure down to its pre-Asian financial crisis level as well.
With the booming stock market, one would think that foreign capital would be plowing money into the US and supporting the dollar. Yet the declining dollar suggests that foreigners appetite for those juicy US Agency bonds (read: Fannie Mae and Freddie Mac mortgage-backed securities) and even treasury bonds is quickly dissipating. That and some higher-than-OECD-average US inflation suggests that perhaps now, finally, the dollar is feeling gravity's pull.