Weak Dollar Spurs Declining Trade Deficit
A slumping dollar has helped spur U.S. exports as well as foreign investment and has contributed to a decline in the Current Account, a measure of international trade. However analysts cautions that this trend may not continue.
“Capital inflows into the U.S. surged in October, but cyclical downside and persistent credit concerns suggest the October print was a flash in the pan and not the start of a new trend,” said Gabriel de Kock, currency economist at Citigroup Global Markets in New York.
“The U.S. external deficit remains large and longer-term trends in capital flows suggest that foreign private investors are becoming less willing to fund the U.S. deficit,” he added.
Foreign investment won’t be helped by the Bush Administration’s mortgage bailout plan which freezes adjustable rates for five years. Anytime you have the government interfering in private contracts, investors will become wary, both foreign and domestic.
While the overall trade deficit has been narrowing in recent months, our trade gap with China continues to widen to record levels. The possibility of a trade war can’t be discounted.
There has been a large outcry of public sentiment for the imposition of trade sanctions. The recent scandal involving contaminated toys manufactured in that country hasn’t helped matters either.
As a large holder of our national debt, China has expressed in recent months, a reluctance to carry such large amounts a dollar denominated assets. A thinly veiled threat of their ability to wreak further havoc on our already beleaguered financial system.
