Global Policy Forum

By Rupert Cornwell

Despite a weakening dollar, the US trade deficit ballooned to its second-highest monthly level in history in March, as a surge in oil prices ahead of the Iraq war pushed oil imports to a record $9bn (£5.6bn).

According to the Commerce Department, imports exceeded exports that month by $43.5bn, a rise of $7.6bn from February and considerably more than expected by analysts, even allowing for the increased cost in oil during the period.

Imports from OPEC countries reached an unprecedented $6.5bn in March, as overall imports climbed to $126.3bn, only fractionally less than the peak of $126.33bn recorded in September 2000, at the height of the Clinton boom.

Before the US-led war with Iraq, oil prices reached $40 a barrel. Since the end of hostilities they have slipped back again to about$25 a barrel. But the suicide bombs in Saudi Arabia pushed prices up as much as 2 per cent at one point yesterday as fears about security in the region were reignited.

Total US exports rose only slightly to $82.8bn, less than most analysts had predicted.

The news of the trade deficit put more pressure on the dollar yesterday and suggests the US deficit may break all records this year – especially if IMF and other predictions are correct that growth will pick up faster here than in the major economies of Europe, and in Japan.

The March returns also are in line with forecasts that the US current account, measuring trade in goods and most services, will show a deficit of $500bn, or some 5 per cent of GDP, for 2003. To finance this deficit, the US must attract foreign capital inflows of some $1.5bn a day. This is alongside a federal budget deficit that could top $400bn this year.

The worsening trade picture has highlighted the dilemma for US monetary policymakers – whether to promote a "strong" dollar to preserve the attractiveness of US markets, or tolerate a decline in the currency. This latter course would boost exports by making them cheaper. But too rapid a decline could make foreign investors less willing to hold dollars, thus making it harder to finance the deficit.

Officially, the Bush administration is wedded to a strong dollar. But John Snow, the Treasury Secretary, sowed uncertainty at the weekend when he acknowledged a weaker dollar would assist US exporters.

Despite acute diplomatic strains over the Iraq war, imports from Western Europe hit record levels in March, while US exports to the region were their best in almost two years.

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