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….

11 thoughts on “DOLLAR BLUES ANEW

  1. jon metcalf

    I think increasingly that forex is divorced from the real economy. Yes there are weak points in the US economy. However there are many weak points in the economies with strong currencies–CDN, euro,UK pound,JPN yen. I personally think that US interest rates are too low and if these increase the USD would perform well. If the Bush Administration corrected the budget deficit, even somewhat, this would help.Your analysis is somewhat unbalanced in the sense that it does not take account of weakness in the other OECD country economies.

  2. robert O"Connor

    Your analysis goes over well-worn territory but offers little new insight. The US runs a liberal economy–open to imports, by definition consumer oriented, supportive of growth and anti-mercantilist. The tax code encourages outward investment.Is it any surprise the US runs a trade deficit? I assume that you are not encouraging the US to abandon these principles. A strong dollar would help achieve these goals. It would would support the stock market, encourage foreign investment and make the US a haven for global savings. Robert Rubin understood this.

  3. Tom Ault

    I have a question for the “dollar doomers:” when will these new lows in the dollar be achieved? By the end of the year? Midway through 2006? 2007? Will the landing be soft? Hard? A “Latin-American-style currency crisis (You heard it here first, folks!)?”

  4. blair carling

    MORE OF THE SAME. I am unsure as to why the dollar is weak and the European, Canadian and Asian currencies are strong. Could it be that the US budgetary deficit and low interest rates offer a better explanation than the trade deficit. If the trade deficit is the problem, how is it the US is not pursuing a hyper-protectionist policy?

  5. John Kingston

    I wonder if your analysis does not take us to a dead end road. I think that currency analysis needs to be more complex–growth, innovation, profitability of investment. Merchandise trade balances are but one factor in global trade. The others are surely, trade in services, tourism trade, royalties and ability to attract investment. I agree with one of the comments above that you skip over the soft spots in the current list of strong currency countries.

  6. Kevin Sterling

    I wonder if your analysis takes us anywhere!I suspect that the dollar may be in a temporary decline as foreign central banks and managers of petro-currencies are diversifying into a basket of currencies. In addition, US interest rates are still too low to attract foreign savings.

  7. James Sheridan

    OK, BUT WHAT IS AMERICA TO DO! Slow growth so as to not pull in foreign goods, balance the budget, subsidize exports and offer tax discounts to foreign investors. The USD would soar and the world economy would collapse.

  8. David Dulaney

    No new news. I’m not surprised by anything here! This is too open-ended, I need more. Check out, they know their shit and provide helpful insights.

  9. Pater Tenebrarum

    analysis of relative currency movements in free-floating fiat money regimes is not as complex as it appears at first blush. in theory, it is the relative speed at which more of those currencies is printed that determines their relative value to each other. in fact, that is indeed what determines their relative values in the LONG TERM. in the short term the moves are basically random, often influenced by the size of net speculative long and short positions in currency futures. the ‘reasons’ that are supplied AFTER the moves have occurred generally are the result of market commentators needing to have SOME explanation for what happened…how could they otherwise comment? in reality all of these purported reasons are entirely spurious. for instance, if a higher trade deficit is the ‘reason’ for a falling dollar, why did the dollar rally from 1995 until 2002, in spite of the fact that the trade deficit soared to fresh historic highs in every single year of that period? so one best forgets about the post fact ‘explanations’ that try to define some fundamental reason for those moves. you never WILL get to hear a word about the printing of money from mainstream observers; nor will you hear much about the actions of speculators in currency futures (too complex, and thus not easily put into the proper ‘soundbite’ format). note by the way that the fundamental argument regarding interest rate differentials holds no water either. from 1998 until today, 7 years later, the Yen has rallied considerably against the dollar – and yet, Japanese interest rates haven’t exceeded US rates for even a second during this time.
    no, the only fundamental that counts is the printing press. but its effects are not instantaneous – they are usually registered with a considerable lag (akin to the uneven spreading of price inflation that results from the central banks growing of the money supply). thus the connection would not easily be made (as in ‘the dollar has gone down TODAY because traders suspected the Fed’s printing press is busier than that of other central banks’), and aside from the more complicated task of explaining longer term economic effects of central bank policies , the establishment such as it is does not WANT the inflation machinery to be discussed too much. after all, its insidious purpose of transferring wealth from those that actually produce it to those who have first dibs on the newly printed money is not to be upset, if possible. better to perpetuate the spin that the engine of inflation actually ‘fights it’ (this is both incredibly laughable and Orwellian at the same time).
    in any event , most commentary on the whys and wherefores of the relative values of free-floating fiat currencies is simply a waste of time. if you e.g. compare the various ‘explanations’ for short term up and down moves during general bull and bear markets, you will be astonished to learn that the very SAME fundamental developments is often declared to be the ‘reason’ for BOTH the up AND the down moves (e.g. dollar goes up on higher trade deficit number; supplied reason: ‘the higher deficit indicates the US economy is stronger than that of other nations’; conversely, if it goes down, it’s ‘the high US trade deficit is a reminder of how much more the US spends than it takes in’ and so forth.

  10. Jonathan

    Excellent post Pater.
    Consider the Swiss franc, in 1971 you got 4.30 for 1 dollar, today, 1.25 … of course there are many variables such as demographics, productivity etc.etc. but a single powerful difference between these two nations is that one has run for most of that period a hard money policy.
    Those people focussing on short term interest rate differentials as an explanatory variable for currencies beyond short term hoohah need to rethink their premises.

Comments are closed.