Trade figures dampen dollar

Hopes of a renewed lease of life for the dollar rally foundered yesterday when the US failed to deliver the improvement in the trade deficit that the markets had been expecting, writes Paul Wallace.

On a day of consolidation, the dollar stood at Y97.97 and DM1.4777 at the London close, virtually unchanged from Wednesday.

The dollar's principal gains were made against the pound, as sterling fell back on market expectations that interest rates in the UK had peaked after weaker-than-expected inflation figures.

For the third month running, the US trade deficit exceeded $11bn. The market had been expecting a deficit of $10.6bn, but the June trade gap turned out to be $11.3bn. However, the May figure, which had initially been estimated at $11.4bn, was revised down to $11.1bn.

The increase in the deficit was because of a larger decline in exports than in imports. Exports fell by 1.2 per cent on the month, while imports fell by 0.6 per cent.

Over the six months between January and June, compared with the same period in 1994, the overall deficit has increased by 28 per cent to $64bn. The principal reason for the deterioration has been the bilateral deficit with Mexico. This accounts for about 70 per cent of the worsening in the overall deficit.

The collapse in economic activity in Mexico - it fell by more than 10 per cent in the second quarter of the year - has wrought havoc with US trade. In the first half of 1994, the US ran a surplus of $1.1bn. This has now turned around to a deficit of $8.6bn.

There was an increase of 6 per cent in the politically sensitive trade deficit with Japan. However, David Bloom, economist at James Capel, said that Japanese data, which is in advance of data from the US, pointed to a large improvement in the bilateral deficit in July.

"We believe the bounce back in the US economy coupled with concerted action to prop up the dollar makes it unlikely that the Fed will move at the FOMC meeting on 22 August," Mr Bloom said.

Support for this view came from a stronger-than-expected indication of business activity in the Philadelphia Fed Index for August. The overall index rose from -23.7 in July to 4.4, compared with a market forecast of -12.4.

Initial jobless claims in the US were much in line with what the markets had been expecting.

Jobless claims in the US rose by 6,000 in the week ending 12 August to reach 338,000. The four-week moving average was 341,000, which the US Labour Department described as being the lowest level of claims since March.