The U.S. balance of trade slipped to another all-time deficit in February–$61 billion vs. $59 billion in January, reports the U.S. Census Bureau. If you thought the news would take a hefty bite out of the dollar, you were mistaken. By the close of Wall Street trading today, the dollar gained ground against the euro and yen.

If that counters forex logic, think again, say the buck’s bulls. The catalyst for that corner of optimism stems from trade between U.S. and China, goes one school of thought. Although America’s trade deficit with China remains firmly negative, February’s level of red ink with the Middle Kingdom actually slipped in February from January, reports CBC.
In another instance of China’s sway over the markets, the International Energy Agency advised that demand growth for oil recently took a breather in the world’s most-populous nation. “Chinese demand growth slowed to 5.4% in the first two months of 2005, well below the 20.8% growth seen a year ago,” IEA reports. The news helped slash the price of a barrel of crude in New York today by almost $2.
The prospect of lower crude prices in turn gave inspiration to the dollar bulls, which in turn comforted the bond market. The yield on the benchmark 10-year Treasury yield fell sharply today, dropping to roughly 4.36%, the lowest since early March. The adjustment in the price of money is in part connected to the optimism that lower oil prices will reduce the U.S. trade deficit.
But while China’s the catalyst du jour for deciphering trends in asset prices, there’s just one problem: Mr. Market’s extrapolating short-term trends for short-term speculation and ignoring the big picture. In the long run, does anyone really think that China’s oil consumption is headed lower? Similarly, is there an economist in the house who’s predicting that Chinese exports to the United States will continue falling in the coming months and years?
Traders in New York are concerned only with the morrow. But elsewhere, the strategists are making plans for the next decade. That includes China’s petroleum strategists. As the Globe and Mail reports today, “China made its first tiny foray into Canada’s oil sands industry Tuesday as CNOOC Ltd. bought a small stake in privately held MEG Energy Corp. for $150-million.” Speaking of the deal, CNOOC’s chief financial officer tells Canada’s National Post, “I am excited with our low cost entry into oilsands, gaining a footstep in this potential area.”