Devil in Deficit Details
Page 2
"Now, we've likely entered a
period of consolidation of the dollar selloff," says Anderson.
Fundamentally, the improvement in the November trade deficit does little for
the dollar. First, the deficit is still the third-largest on record. Second,
the improvement was mostly due to lower oil prices, which have since
rebounded.
Indeed, rising oil prices were putting pressure on stocks Thursday. In recent
action, the Dow Jones Industrial Average was falling 42.89 points, or 0.4%, to
11,000.55. Blue chips were weighed down by General Motors (GM:NYSE -
commentary - research - Cramer's Take), amid concerns it may cut its dividend
due to pressure from private investor Kirk Kerkorian. Coca Cola (KO:NYSE -
commentary - research - Cramer's Take) and JPMorgan Chase (JPM:NYSE -
commentary - research - Cramer's Take) also were weighing on the Dow following
broker downgrades.
The S&P 500 index was recently down 0.23% at 1291.25
and the Nasdaq was down 0.27% at 2325.13.
Third, a continuation in the deficit improvement would be
dependent on global growth fueling U.S. exports.
If Trichet's comments are to be taken at face value, that's
not very good news for U.S. exports. If they're not, the ECB will continue to
boost rates, narrowing the yield differentials with the U.S.
At 2.25%, the eurozone key rate is still below the fed funds rate at 4.25%.
Advantageous yield differentials, including with Japan's near-zero rates,
supported the dollar last year. But things have changed now that the Federal
Reserve has signaled that the end of its 18-month-long rate-hike campaign may
be in sight.
And in terms of currency flows, the trade deficit is not
about to improve, which would boost demand for dollars. On the contrary,
according to Jay Bryson, global economist at Wachovia. "Because imports
are nearly twice as large as exports, the latter must grow almost twice as
fast as the former simply to stabilize the deficit," he wrote.
To play devil's advocate, the narrowing of the November
deficit even may signal economic troubles down the road.
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