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The dollar's decline and the widening deficit

Tue, Jul 1 2008, 05:50 GMT
by Benny Menashe

Finotec Group Inc.

A disorderly decline in the dollar remains a possibility as losses on U.S. assets pile up and the current-account deficit triggers ``a sudden rush for the exits,'' the Bank for International Settlements said. ``Foreign investors in U.S. dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency,'' the BIS said. ``While unlikely, indeed highly improbable for public-sector investors, a sudden rush for the exits cannot be ruled out completely.''

The U.S. current-account deficit, the broadest measure of trade in goods, services and investment income, widened in the first quarter to $176.4 billion, the Commerce Department said on June 17. The U.S. needs to attract $1.9 billion a day from overseas to fund the gap. Foreign buying of U.S. assets rose in April to an 11-month high as total holdings of equities, notes and bonds increased by a net $115.1 billion, the Treasury Department said June 16.

The Japanese currency has appreciated 6.3 percent versus the dollar this year. It has weakened 1.9 percent against the euro. The Japanese currency is forecast to rise to 100 per dollar and 148 against the euro within a year, according to the median of analysts' estimates compiled by Bloomberg. The world's second-largest economy shrank at an annual 0.4 percent pace in the second quarter.

For all his talk of consensus, European Central Bank President Jean-Claude Trichet is having to acknowledge he can't please all of the people all of the time. A rare public division on his 21-member governing council is forcing Trichet to take sides, backing those who want to raise interest rates this week to curb inflation. Doing so may open an ever bigger rift by easing price pressures in Germany, Europe's biggest economy, at the expense of weaker neighbors.

The risk for Trichet is that a strike against inflation now delivers a crippling blow to the euro zone's more fragile economies. Reports last week showed manufacturing and services industries in the region unexpectedly shrank in June, confidence among consumers and businesses fell more than economists forecast and retail sales plunged.

Today's Economic Events

Published on  Tue, Jul 1 2008, 05:52 GMT