Another trade report, another record gap

The dollar edged down against the yen and euro last week after a report showed the second consecutive record US trade deficit in August, but improved sentiment on the US economy stemmed the decline.

“The initial reaction has been to fade the dollar slippage on the back of the trade headlines. There has been a very definite shift in sentiment in the last few days toward a dollar bullish position,” said Shaun Osborne, chief currency strategist with TD Securities in Toronto.

Last week’s sharp upward revisions to US jobs growth has helped to spread the view that the US economy may not be as weak as initially thought, and this has caused expectations for a Fed interest rate cut to recede and the dollar to rally.

The dollar index, a gauge of how the greenback fares against a group of major currencies, rose on Oct. 11 for the seventh straight session for the first time in 18 months. If the index finishes higher, it would be the longest rising streak since May 1998.

The US trade deficit widened to $69.86 billion in August from a revised $68 billion in July, surpassing expectations for a narrowing to $66.7 billion. The August shortfall, exacerbated by higher oil prices, was the second consecutive record number.

“It’s a disappointing number,” said Richard Franulovich, currency strategist with Westpac Bank in New York.

“The trade numbers for September and October should be a little better due to lower oil prices. There was a knee-jerk reaction, pushing the dollar much lower,” he said.

Because of the focus on monetary policy, dealers have mostly shrugged off concerns from analysts and even Fed officials that the US trade deficit is unsustainable on a long-term basis. (Reuters)