US Dollar should continue downdraft
October 12, 2006
The US Dollar should continue it's downdraft in the coming weeks and months,
mostly helped by the news out this morning that the US Trade Deficit has widened
to a new all time record of nearly $70 billion(weren't these deficits
supposed to be getting better?). Also, there was the other deficit information
released yesterday showing that the Federal Budget Deficit (FBD) has been halved
and is now sitting at roughly $250 billion.
I'm going to have fun with
the FBD statistics for a minute and explain why this major decrease in the
deficit is an aberration. Digging into the stats,
you can find that Federal spending has not decreased or stayed level. It's
actually increased nearly 8% on an annual basis. On the flipside, the influx
from tax revenues has increased incredibly because of the windfall profits so
many US corporations have been enjoying over the past year. So the government
isn't decreasing spending, but continuing to increase, while they are depending
on corporate profit levels to pay higher taxes as we head into what the Fed is
calling a "softening of the economy". Regardless of if we have
a soft landing or a hard landing, those tax revenues the government is enjoying
will slow. And because we haven't curbed the government spending habits,
this problem will become exacerbated, sending the US dollar lower in short order. The
next leg up in our gold bull market will be led by a major break in the dollar
index followed by gold's reassertion as a fourth global currency. We're
not there quite yet, but it's coming.
* * *
U.S. Trade Deficit Unexpectedly Widens to a Record
By Joe Richter
Oct. 12 (Bloomberg) -- The U.S. trade deficit unexpectedly widened to a record
$69.9 billion in August as energy prices rose and the shortfall with China reached
an all-time high.
The deficit rose 2.7 percent from a $68 billion gap in July, the Commerce
Department said in Washington, and exceeded the highest estimate in a Bloomberg
News survey of economists. U.S. companies imported more computers,
commodities and consumer goods at the same time they shipped a record amount
abroad.
Americans' penchant for Japanese electronics and cheaper goods from China shows consumer
spending is holding up even as the housing market falters. While a weaker dollar
and expansion in Europe and Asia are helping boost exports, improvement in
the trade deficit will be slow because the U.S. economy is still growing faster
than many of its counterparts, economists said.
"The U.S. is still the engine of growth for the rest of the world," said
Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts.
"Going forward I would expect the deficit to ease a little bit because energy
prices have come down."
The dollar fell against the yen and euro after the report. The August deficit
compares with the $66.7 billion median estimate in a Bloomberg News survey
of 66 economists after a previously reported $8 billion gap. Forecasts ranged
from $63.5 billion to $69 billion.
The deficit adjusted for changes in prices, figures the government uses in
its calculation of gross domestic product, widened in August to $60.2 billion,
the highest since January. The figures suggest the trade balance will detract
from U.S. economic growth in the third quarter.
"Trade will still be a drag of about 0.8 percentage point on third-quarter
growth," said Ian Shepherdson, chief U.S. economist at High Frequency Economics
in Valhalla, New York.
Deficit With China
The politically sensitive trade deficit with China widened to $22 billion from
$19.6 billion in July, exceeding the previous record of $20.5 billion reached
in October 2005. Today's report showed that imports from China increased to
an all-time high $26.7 billion in August. U.S. exports to the Asian nation
fell to $4.8 billion.
Today's figures may aggravate tensions with the U.S. lawmakers who say an
undervalued Chinese currency is unfairly helping the Asian nation's exporters.
While the Chinese yuan has been allowed to gradually strengthen, today's figures
show it's done little to correct the imbalance with the U.S. The yuan last month
had the biggest gain of any month since the country ended a link to the dollar
in July 2005.
Weaker Dollar
A weaker dollar, which makes American goods cheaper overseas, will also help
grind down the U.S. trade deficit in coming quarters, economists said. The
dollar has declined 2.2 percent this year against a basket of currencies of
major trading partners.
A narrower trade deficit added 0.42 percentage point to economic growth in
the second quarter, which expanded at an annual rate of 2.6 percent, the government
said last month.
"The good news is, what changed in the last year is that our exports are
up pretty nicely," said Burlington Northern Santa Fe Corp. Chief Executive
Officer Matthew Rose, in an interview Oct. 5.
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