Grim US deficit hits dollar

A record US trade deficit dealt the dollar a severe blow yesterday. America's politically sensitive deficit with Japan narrowed for the fourth month running, but the overall gap between exports and imports of goods and services climbed to $11.5bn in July.

The far grimmer-than-expected figure offset any benefits the US currency might have enjoyed as a result of the 14,220bn Japanese budget package. It fell from the previous day's 104.5 to a low of 102.8, although it recovered somewhat in later New York trading. The dollar also fell briefly below DM1.47.

David Coleman, chief economist at CIBC, said the sharp reaction in the currency markets was the result of a sense of anti-climax after all the good news for the dollar in recent weeks.

Economists saw mixed news in the figures, but Mickey Kantor, the US Trade Representative, insisted that "the trends are in the right direction".

The worsening in the US trade position in July was due mainly to higher imports from and lower exports to western Europe. The gap widened from $1.6bn in June to $3.1bn.

There was a particularly sharp deterioration in trade with Germany. High US summer car sales favoured German imports.

Mr Kantor also highlighted America's weaker trade position with China. The bilateral US trade gap with China is its second-biggest after the Japanese deficit. It rose to $3.3bn in July.