TRADE AND THE DOLLAR : U.S. Trade Deficit Plunges : February Figure Falls 25%; Greenback Stabilizes on News
The dollar steadied Wednesday in world currency markets as the government reported a steep reduction in the U.S. trade deficit in February, helped by a significant and somewhat unexpected improvement in the nation’s balance of trade with Japan.
But the nation’s trade deficit with Mexico hit a record high in response to the peso crisis, the Commerce Department said. U.S. exports to Mexico fell sharply, hindered by an unfavorable exchange rate triggered by the devaluation of the Mexican peso.
The overall deficit in goods and services was $9 billion in February, the department said, a drop of 25% from the January figure of $12 billion. Exports grew nearly $1.5 billion from January’s $61 billion, to the second-highest monthly level in history, while imports fell by $1.5 billion from the previous month’s $72.9 billion.
The trade gap with Japan narrowed to $4.7 billion in February, the Commerce Department said, with U.S. exports to Japan reaching a record $5 billion. It was the fourth consecutive month of improvement in the U.S.-Japan trade balance.
The sharp decline in the overall deficit cheered stock and bond investors, as the Dow Jones industrial average rose 28.36 points to close at 4,207.49, just below its record high of 4,208.18 set April 13. The yield on the benchmark 30-year Treasury bond fell to 7.36% from 7.39%, as its price rose.
At the end of the day, the dollar was trading at 81.30 yen in New York, up slightly from 80.63 on Tuesday, and at 1.3720 German marks, up from 1.3538. It hit a record low of 79.85 yen earlier in the day.
The smaller trade shortfall could ease the growing tension over the difficulty U.S. companies have experienced in trying to sell automobiles and auto parts in Japan. Although autos remain the centerpiece of U.S.-Japan trade, the narrowing deficit calls attention to the widening scope of commerce between the two countries.
Overall, U.S. Trade Representative Mickey Kantor said, the latest trade figures are better for the United States, “and they’re substantially better with Japan.”
“For the first time, we had (monthly) exports to Japan exceed $5 billion,” Kantor said. U.S. companies sent $5.02 billion worth of exports to Japan, suggesting some degree of success in the government’s effort to gain more entry to that nation’s consumer and business markets.
The latest figures, while considered somewhat unreliable in terms of establishing a trend because they measure only one month’s activity, come at a time when increasing attention is being paid to trade and international economic issues.
With the dollar flirting daily with record lows against the Japanese yen and the German mark, U.S. products have become cheaper in export markets while goods from other countries, notably Japan, become more expensive in this country.
That bodes well for the U.S. trade balance; the dollar has dropped nearly 20% against the yen since the beginning of the year.
The value of the dollar and the trade figures are, to a degree, related. While other factors come into play as well, America’s chronic trade deficit has caused dollars to accumulate overseas. As foreign holdings of U.S. dollars continue to grow, the law of supply and demand becomes a factor, making dollars less attractive to overseas investors.
Proposals to bring more stability to international trade and currency systems, in particular by increasing the role of international financial institutions, are likely to be at the top of the agenda at next week’s spring meeting of the International Monetary Fund. Finance ministers from around the world, most notably from the United States’ major trading partners, will gather in Washington for the sessions.
IMF Managing Director Michel Camdessus has been quietly critical of U.S. interest rate policy, which affects the dollar’s value on international markets. Earlier this week, he said the Federal Reserve Board should have defended the dollar by raising interest rates when the central banks of Germany and Japan recently cut their interest rates. Higher U.S. rates make investment in this country more attractive to foreigners and bring dollars back home.
“From the global perspective of the world reserve currency, it really does hurt everyone when the dollar has been falling so precipitously,” said economist Charles W. McMillion, president of MBG Information Services. “So the IMF is under enormous pressure to stop the fall.”
Meanwhile, the Commerce Department published its annual report on the global economic outlook, predicting a growth rate of 3.5% this year, the fastest rate in seven years.
The U.S. trade deficit is expected to increase to $113 billion, up from $108 billion in 1994, according to the U.S. Global Trade Outlook. But exports of U.S. goods and services are expected to increase between 10% and 11%, a considerable improvement over the average 6.7% growth rate recorded since 1990.
* STOCKS RALLY
The Dow industrial average closed just shy of a new record high. D3
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
U.S. Trade Rally
The Deficit in Billions of Dollars:
Feb. 1995: -$9.01
Source: Commerce Department
U.S. Trade Rally
The Deficit in Billions of Dollars:
Feb. 1995: -$14.20
Source: Commerce Department
