Could this be the “turning point” for the US economy? asks Edward Hadas in Breakingviews.com. Finally the March trade deficit has shrunk, down to $55bn, a 9% drop from February’s figure. Moreover, April’s employment report was stronger than expected, while analysts are considering hiking their estimations for growth in the US economy to 3.6% from current predictions of 3.1%.
The news has also pushed up the dollar to a three-month high versus the euro. Even away from the limelight, the US currency has steadily strengthened versus the euro, Lex says in the FT. What with the eurozone growth looking rather poor – having recently been revised downwards – the euro could be facing tough times ahead, particularly if the French vote against the European constitution at the end of May. What’s more, if China were to revalue its yuan, which is currently pegged to the dollar, investors are likely to buy Asian currencies as they anticipate further appreciation, while selling the euro. The greenback also “enjoys a rising yield advantage”, Lex says, as it costs money to hold dollar short positions.
Yet is this the start of a trend: where the dollar strengthens as the US economy eases out of its “soft patch”? Don’t count on it, Hadas says in Breakingviews.com. March’s deficit figures are but one month’s data, and could likely be an aberration. And remember, the figure is still 17% higher than March last year. The “sustained shrinkage” of the trade deficit requires a massive hike in American capital spending and a large drop in US consumption. Until that day comes, “all dollar revivals are likely to prove temporary”.