Markets shrug off record US trade gap
[hey, it's a privilege so sell high quality goods and materials to the American consumer at a low price. They are the only guys who ain't scared of a little debt, and the only guys keeping this world economy on the go -g-...pb]
By Peronet Despeignes in Washington and John Labate in New York
Published: October 19 2002 0:10 | Last Updated: October 19 2002 0:10
news.ft.com
The US trade deficit reached a new record in August as buoyant consumer spending continued to suck in imports, according to official figures released on Friday.
The data highlighted weakness abroad and what some economists consider a growing threat to the dollar and the US economy. But the market reaction was muted with the dollar little changed and share prices holding on to gains in what has been the biggest seven-day rally in nearly 30 years.
The Dow Jones Industrials Average closed 47.36 points higher at 8,322.40, a rise of more than 14 per cent since last Thursday. The rally followed six weeks of selling that had sent the Dow to a five-year low.
There are widespread doubts about whether the rally can be sustained, however, given the mixed evidence about the state of the recovery. "The rally isn't convincing everybody that we've hit bottom yet," said Taai Izushima, head trader at Daiwa Securities America.
The trade deficit grew to $38.5bn in August from a revised $35.1bn in July, the Commerce Department said, as exports fell for the first time in six months and imports rose to their highest level this year. The deficit has widened significantly this year as the economy has recovered faster than those of most of its main trading partners.
Many economists fear this means a growing risk of turmoil in financial markets.
The US must attract a net $1bn a day in foreign capital to sustain it, and keep the dollar and equity markets from falling and interest rates from rising.
Foreign investors are continuing to buy US assets on the basis that America, for all its travails, remains a safer and better place to invest than most alternatives.
The size of the broadest measure of the deficit, the current account, is approaching 5 per cent of US gross domestic product - a level generally associated with currency crises in other advanced nations and emerging markets.
Some economists argue that the dominance of the US economy and its currency places it beyond such a comparison but many are debating whether any future adjustment will be smooth and gradual rather than abrupt and destabilising.
The Organisation for Economic Co-Operation and Development warned earlier this week in its latest report on the US economy that the dollar could fall as much as 40 per cent in inflation-adjusted terms because of the deficit, but it was "very difficult to gauge" how such an an unwinding would occur.
Separately, the Labor Department said its consumer price index rose 0.2 per cent in September after a 0.3 per cent increase in August. Excluding food and energy, the CPI rose only 0.1 per cent last month, suggesting inflation remains low and steady. That has allowed the Federal Reserve to keep short-term interest rates at 40-year lows to support the recovery. |
