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Dollar Falls Against Euro After U.S. Says Trade Deficit Widens in August
Oct. 14 (Bloomberg) -- The dollar fell against the euro after the U.S. said the trade deficit in August
widened to the second biggest ever as spending on oil boosted imports. The trade gap, the amount by
which imports exceed exports, increased to USD54 billion in August from a revised USD 50.5 billion,
the Commerce Department said. The median forecast of economists in a Bloomberg poll was for a
shortfall of USD 51.4 billion. A larger deficit means more dollars need to be converted to other
currencies to pay for imports. “The trade deficit is not only getting wider, but it will continue to
increase, and that will undermine the value of the dollar,” said David Durrant, chief currency strategist
in New York for Bank Julius Baer & Co., which manages USD 95 billion.
Against the euro, the dollar dropped to 1.2386 USD/EUR at 5:01 p.m. in New York from 1.2338
USD/EUR late yesterday, according to EBS, an electronic foreign-exchange trading system. Against the
Swiss franc, the dollar was quoted at 1.2438 CHF/USD, down from 1.2529 CHF/USD; The U.S.
currency was little changed versus the yen, trading at 109.67 JPY/USD, down slightly from 109.69
JPY/USD. The dollar may weaken to 1.26 USD/EUR by year-end, Durrant said.
“The dollar pared losses after it weakened to USD 1.2420 per euro, where some traders placed
automatic orders to buy the dollar,” said Chris Melendez, president of currency hedge fund Tempest
Asset Management in Newport Beach, California. “The market was short of dollars ahead of the
numbers, and traders are eager to book any profits,” he said.
“Facing a Problem”
“Widening deficits in the current account, the broadest measure of trade because it also includes
investments, may cut demand for the dollar,” Robert McTeer, president of the Federal Reserve Bank of
Dallas, said in a speech in New York on Oct. 7. The current-account shortfall reached a record USD
166.2 billion in the second quarter. Imports of goods and services increased 2.5 percent to a record USD
150.1 billion in August, led by petroleum products and USD 18.1 billion worth of Chinese products.
Exports rose 0.1 percent to USD 96 billion. Crude-oil prices are up 70 percent over the past year. The
trade deficit, reported monthly, rose to a record USD 55 billion in June.
``The dollar is facing a problem from the deficit,” said Peter Frank, a Chicago-based currency strategist
at ABN Amro Holding NV, the biggest Dutch bank by assets. ``Every day there's an excess supply of
dollars over demand, and there's not enough capital flow to offset this.”
McTeer joined San Francisco Fed President Janet Yellen and Kansas City Fed President Thomas
Hoenig, who have expressed concern in the past month about the current-account deficit. The central
bank doesn't set currency policy, which is managed by the Treasury.
“Fed Fascination”
“The Fed is clearly worried that the current-account deficit could push market interest rates higher at the
exact time the economy appears to be slowing, so why not pre-emptively talk down the dollar to
mitigate the damage?” said Yianos Kontopoulos, head of global foreign-exchange strategy at Merrill
Lynch & Co. in London, in a note to investors yesterday. “The Fed's recent fascination with the foreignexchange market reinforces our long-held belief that the U.S. dollar still needs to fall,” Kontopoulos
wrote. He wasn't immediately available to comment on the note.
Another government report today showed the number of Americans filing first-time jobless claims rose
last week. First- time jobless claims increased by 15,000 to 352,000 in the week ended Oct. 9, the Labor
Department said.
Retail Sales
The dollar's decline may be limited by expectations reports tomorrow will show U.S. retail sales rose in
September. Sales probably gained 0.7 percent after a 0.3 percent drop in August, according to the
median of forecasts in a Bloomberg News survey. “U.S. economic data suggest the economy is doing
OK, so there's no need for the dollar to weaken much on trade data,” said Osamu Takashima, chief
analyst of the foreign exchange and treasury division in Tokyo at Bank of Tokyo-Mitsubishi Ltd., a unit
of Japan's second-biggest lender.
“When the economy is good, the deficit grows.” The dollar may rise to 112 JPY/USD and to 1.20
USD/EUR in a month, he said.
Japan's currency may struggle to sustain today's gains as Japanese stocks fell for a fifth day and rising
oil prices stoked concern the country's exporter earnings will drop. Japan imports virtually all crude oil.
The yen has fallen 0.5 percent since trading at a one-month high on Oct. 11. The Nikkei 225 Stock
Average extended its six- month decline to 8.8 percent.
Hiroshi Okuda, chairman of Japan's largest business lobby, said on Oct. 12 that should the price of oil
remain above USD 50 a barrel, “it will affect Japan's economic growth.” The same day, oil futures
reached a record USD 54.45, the highest since the contract began trading in 1983. Today, crude oil
reached another record, USD 54.88 a barrel, on the New York Mercantile Exchange.
Exports keep Japan afloat
Japan's economy is still split down the middle with exports shooting up but shoppers at home refusing
to spend, the latest figures show. Numbers released on Thursday morning show that the current account
surplus - the measure of how much exports exceed imports - was up 58.1% in July over the previous
year's reading. The data marked the tenth straight month of year-on-year gains, the Finance Ministry
said.
A day earlier, overall economic growth in the April-June quarter was confirmed at 0.6%, the first
expansion since March 2001.
Still, the return to expansion cannot disguise the weakness at the heart of the Japanese economy. Strong
demand from Asian neighbors is helping to offset the new weakness of the dollar -which risks making
Japanese goods too expensive in the US- leaving exports 8.9% higher than a year earlier. But a profit
warning from electronics giant Hitachi on Wednesday sparked renewed fears that the export boom
which is keeping Japan Inc afloat could be tailing away.
And domestic demand shows no signs of picking up. Consumers remain unwilling to spend while
deflation means goods will probably keep getting cheaper and cheaper, and that means both domestic
sales and imports are on a low flame, down 0.2%.