Dollar Shored Up as U.S. Trade Deficit Soars : Currency: Gap skyrockets 44% to $12.1 billion in June--the second-worst in history and most severe in six years.
U.S. and Japanese officials moved Thursday to shore up the flagging U.S. dollar, calming financial markets rattled by a report that the U.S. trade deficit in June soared to the highest level in nearly six years.
The New York Federal Reserve Bank began buying dollars, and Japan’s economic ministers said they will form a special council to cope with the yen’s surge, as the Commerce Department reported that the U.S. trade deficit in June soared 44% to $12.1 billion. It was the second-worst trade gap in history.
The surprising increase in the deficit shocked financial markets, sending the dollar tumbling against the yen until the Fed’s action bolstered the greenback.
The Fed’s buying spree boosted the dollar, which rose further after Treasury Undersecretary Lawrence Summers released a statement that said the Clinton Administration is “concerned that the recent rapid rise in the value of the Japanese yen could retard growth in the Japanese and world economies.”
The Fed’s buying “was heavy and direct . . . it came in waves,” said economist David Jones of Aubrey G. Lanston & Co., a New York investment company. “That means they mean business.”
The intervention pushed the yen to 105.95 to the dollar in late trading in New York, up more than 4% from Wednesday’s close of 101.60.
The dollar was also helped by news from Tokyo, where Japan’s economic ministers said an emergency council will be charged with boosting their nation’s economy and coping with the yen’s surge.
After the Tokyo announcement, President Clinton and Japanese Prime Minister Morihiro Hosokawa held a 20-minute phone conversation and announced they will soon hold a meeting to deal with the two nations’ trade problems.
Although U.S. officials had silently cheered the yen’s march upward in recent months on the theory that a weak dollar would increase demand abroad for cheaper U.S. goods, in reality the strong yen has so far only increased the value of Japanese exports to the United States while a worldwide economic slump has dampened demand for U.S. goods.
The disappointing numbers reflected economic problems abroad rather than a worsening economy in the United States, analysts said.
“Our recovery is still on track, but most other countries are still stuck in recession,” said Lynn Reaser, chief economist of First Interstate Bancorp in Los Angeles.
“We’re not going to see any huge improvement in our export picture until the economy in other parts of the world starts to improve.”
But with the Japanese still stinging from their worst recession since World War II and most other industrialized nations suffering downturns of their own, consumers and manufacturers in most other countries simply aren’t buying U.S.-made goods.
“Foreign consumers are just like us--they don’t buy things when times are tough,” said Jim Maccario, a currency trader for Bank of Boston. “And right now, times are tough all over the world.”
The $12.1-billion trade deficit in June was caused by a large drop in U.S. exports and a big jump in imports, the Commerce Department said.
Exports to other countries fell 3.3% to $37.6 billion, the government said, while imports rose 5.1% to a record $49.7 billion.
The U.S. deficit with Japan jumped 15.5% to $4.3 billion, accounting for more than a third of the total trade gap. The second-largest trading deficit was with China, at $2 billion.
Although many analysts were surprised by the trade numbers released Thursday, most said the gap should narrow as consumers both here and abroad slowly change their buying habits.
Consumers in other countries will probably start buying lower-priced U.S. goods to stretch their income, while Americans will balk at paying higher prices for cars, computers, stereo equipment and other items made overseas, these analysts contend.
“When prices start going up for items made in foreign countries, Americans either delay their purchases or eventually start buying items that were made here,” said Maureen MacFarland, an economist for investment bankers Brown Brothers Harriman & Co. in New York. “Either way, the trade deficit should gradually improve.”
A Shock for the Dollar
The dollar’s dramatic slide against the Japanese yen--underscored by the worst monthly trade figures in six years--prodded both President Clinton and the new Japanese government into action Thursday. The result: a sharp boost for the U.S. currency.
Dollar in yen:
Aug. 19: 105.95
U.S. merchandise trade deficit (Billions of dollars, seasonally adjusted):
June, 1993: $12.06
Sources: Commerce Department, Associated Press
