US trade deficit reaches record levels? USD rallies!
The dollar rallied anew against European currencies on Wednesday despite the US trade deficit reaching record levels.
Dollar rallies anew despite widening deficit
by Steve Johnson in London
Published: March 10 2004 12:03 | Last Updated: March 10 2004 17:23
The dollar rallied anew against European currencies on Wednesday despite the US trade deficit reaching record levels. The deficit widened to $43.1bn in January, from an upwardly revised $42.7bn in December, confounding expectations for a modest decrease.
Yet the euro weakened against the greenback, slipping 2 cents to $1.2224. Sterling fell almost 4 cents to a seven-week low of $1.8013 against the dollar as it was pounded by the ramifications of the UK's own record trade deficit.
Daragh Maher at ING attributed the dollar's strength against European currencies to a significant narrowing of the US deficit against these nations. The US gap with the eurozone fell to $6.6bn, from $11.1bn in December, with the deficit against the UK down to $0.4bn from £1.1bn. The trade gap with Asian nations rose, however.
"This shows that the burden of adjustment is falling primarily on western European nations rather than those countries that have pegged their currency against the dollar," said Mr Maher. "This has negative implications for European growth."
Indeed sterling was weak against a basket of currencies, suffering a continued hangover from Tuesday's dire trade figures. The pound fell to a four-week low of £0.6789 against the euro, and a three-week low of Y199.59 against the yen, although Paul Robson, economist at Bank One, argued the slide was nothing more sinister than profit-taking after sterling's sharp rise since January. Speculators were also said to be liquidating long sterling and euro positions.
The Norwegian krone slid to a one-week low of NKr8.709 against the euro before steadying. The slide was triggered by Norwegian consumer price inflation turning negative, bolstering expectations that the Norwegian central bank will cut its key deposit rate by 25 basis points to 1.75 per cent today. Credit Agricole Indosuez even raised the prospect of a 50 basis point cut.
The Czech koruna fell to a one-month low against the euro of Kcs33.14 as the Czech National Bank revised down its estimates of foreign direct investment inflows for 2002 and 2003.
"The Czech Republic is no longer finding it easy to finance its large current account deficit [6.6 per cent of GDP] by privatising state assets," said Monica Fan, senior currency strategist at Royal Bank of Canada. "Not only is the government going to run out of state assets to sell, Czech investors are increasingly going to invest in eurozone equities."
The Hungarian forint rallied to Ft253.07 against the euro, a five-month high, after hitting lows of Ft270 in January. The latest move was precipitated by comments from Gyorgy Szapary, the vice-governor of the central bank, that rising inflation mitigated against rate cuts, reinforcing the forint's attraction for carry trades. |
