Global Policy Forum

Sinking Dollar Aids Exports, but Trade Gap Grows


By Kelly Evans

November 15, 2009

The dollar's recent weakness is helping boost the sale of US goods abroad, but it isn't yet narrowing the nation's trade deficit.

While exports of goods and services rose by a seasonally adjusted $3.7 billion in September, higher fuel prices and strong demand for imported autos more than offset the gain, pushing the trade deficit to its widest point since January and highlighting a dilemma for policy makers: As the economic recession winds down, the trade deficit is quickly expanding.

US imports rose by $9.3 billion in September to $168.4 billion, the Commerce Department said Friday. The 5.8% increase from August was the largest one-month percentage gain in 16 years, and helped push the trade deficit to $36.5 billion in September from $30.8 billion the month before.

"The widening deficit is a warning that as US domestic demand increases, imports will bounce more than exports," said Nigel Gault, chief US economist at consulting firm IHS Global Insight. "That means that the trade deficit will keep widening, and that trade will be a drag on growth."

The September figures will knock nearly half a percentage point off the nation's estimated 3.5% growth in gross domestic product during the third quarter, he added. Imports undermine the nation's growth because they send consumer and business dollars abroad, and thus must be subtracted from total spending in any given quarter.

Meanwhile, a separate report Friday produced by Reuters and the University of Michigan showed consumer sentiment declined in November for the second month in a row, which could keep a lid on spending in the months ahead. Prices of imported goods posted a 0.7% gain in October, another report by the US Labor Department showed, and remain 5.7% below year-ago levels, suggesting inflation pressures remain at bay.

Although increased imports pushed the trade gap wider in September, they also signal that economic conditions are showing some improvement.

"It's an indicator that people have money to spend," said Zach Pandl, an economist with Nomura Securities. "The fact that total volumes are improving is a good sign the economy is pulling out of recession."

Long term, however, economists say the US needs to address its trade deficit by spurring exports to help offset imports of other nations' goods and services. One way to do that is by lowering the value of the dollar relative to other currencies, making US goods and services cheaper abroad and more attractive to buyers.

That is already beginning to take place, as a recovery of the global economy has reversed investors' "flight to safety" that spurred demand for dollars during the past year. The US dollar has been trading near a 15-month low this week against a basket of other currencies.

Even so, "the dollar may need to decline further," said Mr. Pandl, to spur exports enough to help narrow the trade gap and boost US economic growth.

But the US currency's downward slide is being met with resistance among trading partners from London to Bangkok to Sao Paulo, who are concerned the weak dollar is hurting their own competitiveness in export markets. A number of emerging nations are intervening in currency markets to buy dollars and stem the appreciation of their own currencies.

Meanwhile, the falling dollar is also prompting some public outcry in the US, forcing policy makers in the White House and Treasury to reiterate their commitment to a strong currency even though its falling value is a help to many US businesses.

"There are huge disagreements about the speed and cost" of the dollar's decline, Mr. Pandl said. "The realignments we're looking for are still a ways off."



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