Is the dollar’s rally in 2005 history? It’s more than a little easy to suspect as much in August. After rallying 10.5% this year through the end of July, the U.S. Dollar Index has reversed course thus far in August, falling 2.7% through this morning’s trading. The recent fall from grace raises new questions about the greenback, which previously suffered a three-year bear market through the end of 2004. But the bulls were heartened by the dollar’s rebound this year, recently bolstered by recent economic news that showed the American economic expansion alive and well. What happened?
For starters, the forex market was reminded this morning that the U.S. continues to suck in imports at a faster rate than it spits out exports. Or, in the vernacular of international economics, America’s trade deficit continues to widen. The trade balance for June slipped to -$58.8 billion, a 6.3% deterioration from May’s -$55.3 billion, the Bureau of Economic Analysis reports today. That’s not quite as bad as the -$60.1 billion logged in February, but it wouldn’t take much to set a new record in the months ahead, and who in the dismal science really expects that a new all-time low in the trade deficit isn’t just around the corner?
It’s more than a little troubling to note that while imports in June grew by $3.4 billion to $165.6 billlion, exports of goods and services were “virtually unchanged,” according to BEA. And it gets worse: goods exports actually decreased, mainly in foods, feeds, beverage, consumers goods and industrial supplies and materials.
Forex traders seem to have anticipated the obvious, selling the buck ahead of the news in recent weeks. Perhaps the realization that the American economy continues to chug along sent a signal of some contrarian aura to those who ply the currency markets for a living. Recall that some have warned in recent years that a global economic imbalance stalks the international scene, namely, an America that consumes like there’s no tomorrow while Asia is more inclined to save. In Europe, meanwhile, the economies on the Continent are sufficiently weak relative to America so as to cast doubt on the prospects of materially expanding U.S. exports to the likes of France and Germany. “The U.S. economy is simply stronger than that of most of our trading partners and modest currency movements have proven insufficient to remedy the balance,” Stephen Stanley, chief economist at RBS Greenwich Capital, tells MSNBC.
Nonetheless, the events of recent vintage have extended a cozy relationship that’s served Joe Sixpack well. Joe, of course, has a taste for any number of consumer goods and gadgets. He likes a wide selection, and he likes his gadgets cheap. That’s where Asian suppliers, including China, have stepped up to the plate, supplying Joe with what he wants, and then some, and at prices he just can’t refuse. The result has been a rising flow of dollars into foreign economies in exchange for an ascending mix of goods arriving in droves at such locales as the Port of Long Beach in California. As you might expect for this crucial point of entry for Asian imports into the U.S., business has been good, and exploding truck traffic in and out of the port is among the smoking guns. So too is the fact that inbound container traffic at the port is up 18.5% year to date through the end of June. What’s more, inbound container flows outnumber outbound by nearly three to one.
But let’s be clear about the trade deficit: the pressing problem for the American economy on this front is less about Joe buying a new Chinese-manufactured television set on the cheap. The far bigger issue to grapple with is the fact that America’s oil imports continue to rise, and with the price of oil doing no less, the combination weighs heavily on the balance of trade. The dollar value of crude imports jumped to a record $14.6 billion in June, up from $13.7 billion in May. The volume of crude imports also grew in June, rising to 328.3 million barrels from 318.6 million barrels the month before. Considering that the price of crude, as of yesterday’s close, was up 16% from the end of June all but insures that oil will continue to be a thorn in America’s trade deficit for some time.
No wonder, then, that forex traders are selling. “Given the dollar’s current negative disposition, this disappointing [trade deficit] number highlights once again the dollar’s structural liabilities and should facilitate further dollar selling,” opines Alex Beuzelin, foreign exchange analyst at Ruesch International, in a Reuters story today. “I would expect this to translate into fresh lows for the U.S. currency.”
Look out below….