Dollar tumbles after record trade gap
By Kevin Plumberg
news.yahoo.com
The dollar tumbled on Wednesday after a report showed the U.S. trade deficit hit a record high in October, worsening overnight losses on concerns the Federal Reserve is nearly done raising interest rates.
The U.S. currency's decline was its steepest against the yen in a single day since March 2002. It began after the Federal Reserve on Tuesday dropped the word "accommodation" from its policy statement, interpreted by some as a signal that its 18-month credit-tightening campaign was nearing an end.
The dollar sank to its lowest level in a month against the yen, around 116.72 yen according to Reuters data.
By 1:12 p.m., the dollar sank 2.5 percent to 117.00 yen .
The dollar fell even more after the Commerce Department reported that the gap between U.S. imports and exports widened to a shortfall of $68.9 billion, far exceeding economists' expectations for a deficit of $63 billion.
"People are getting ready for the end of the tightening cycle and they are beginning to feel like the dollar's rally is nearly over," said Tom Benfer, vice president of foreign exchange at Bank of Montreal in New York.
"The record trade gap didn't help at all," he said.
The U.S. trade deficit with Canada, China, the European Union, Mexico and OPEC also all worsened to records, spurred by the largest drop in exports since 1991.
If Americans continue to buy more foreign goods and services than U.S. businesses can sell overseas, the flow of dollars leaving the country will increase and if foreigners do not invest heavily in U.S. assets, the greenback's value will fall.
Moreover, the huge trade gap will likely take a chunk out of gross domestic product growth in the fourth quarter of 2005, economists said, supporting the argument of dollar bears that the U.S. economy will slow heading into next year.
"On a real basis the trade deficit widened by over $1.7 billion for the month and places the trade balance on a trajectory that would likely reduce fourth-quarter GDP growth by more than 0.5 percent," said Drew Matus, an economist at Lehman Brothers.
SUN SETS ON DOLLAR, RISES ON YEN
Meanwhile, the euro jumped to a near six-week high of $1.2061 , up around 1 percent compared with late Tuesday, before settling back to $1.2022.
Against the yen, however, the euro had its worst one-day drop since China revalued its currency in July, falling 1.7 percent to 140.64 yen .
The Canadian dollar and British pound suffered their largest one-day falls against the resurgent yen in seven years as traders who had built up extreme bets against yen unwind their positions.
The dollar's sharp drop also helped drag it to a 14-year low against the Canadian dollar of C$1.1428 , but it later recovered to an intraday high of C$1.1533.
The record trade number and the aftermath of the Fed's injection of uncertainty into the market prompted some traders to take profits on their remaining bets on the dollar's strength this year.
Technical analysts said the dollar was definitely due for a correction after rallying more than 10 percent this year against major currencies.
"The long-awaited downside correction in the U.S. dollar is now underway, and appears likely to continue for the near-term due to extreme institutional and retail investor sentiment readings and unmet minimum measuring objectives based on the greenback's breakdown earlier this week," said John Kosar, president of Asbury Research.
A slightly weaker-than-expected Bank of Japan tankan survey of business confidence gave the dollar a slight boost in Asian trade overnight, but investors stepped in to sell, particularly against the yen.
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