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Dollar Dips After Record Trade Deficit
MarketWatch.com, March 9, 2006
New York (MarketWatch) - The dollar edged slightly lower against major rivals early Thursday after fresh economic data showed the nation's trade deficit widened to a new monthly record in January.
Meanwhile, the yen, after an initial drop, rallied across the board after the Bank of Japan moved to scrap its five-year old deflation-fighting ultra-easy monetary policy but pledged to maintain a low interest rate environment.
"Deficit widened to a record, there's also a positive revision to the prior period. The surprising thing is despite the trade deficit widening to a record, the dollar has not suffered a significant damage," said Brian Dolan, head of currency research at Gain Capital. "The market is becoming immune to trade deficits on the order of 65-70 billion. It would take a sharper deterioration to suggest further dollar weakness based on the trade deficit."
The market is focusing on Friday's nonfarm payrolls report, he said.
In early New York trading, the euro changed hands at $1.1926, up 0.02%, while the dollar was down 0.2% at 117.51 yen.
The euro was fetching 140.15 yen, down 0.2%.
Earlier, the Commerce Department said the trade gap widened 5.3% to a new monthly record of $68.5 billion. The previous record was $67.84 billion in October. Both exports and imports hit new records in January, although imports outpaced goods shipped overseas.
Analysts surveyed by MarketWatch had expected the deficit to increase to $66.4 billion.
The estimate of the December trade deficit was slightly lowered to $65.1 billion from the initial estimate of $65.7 billion.
Dolan said "the rise in imports is a strong indicative of continued robust U.S. domestic demand, and the overall rise in exports is an indicative of solid global demand."
Separately, the Labor Department said initial applications for U.S. state unemployment benefits unexpectedly rose by 8,000 to 303,000 in the week ending March 4.
Economists expected a slight drop in initial claims to about 293,000, according to the MarketWatch survey.
Ultra-easing policy ends
The Bank of Japan, by a vote of 7 to 1, concluded that economic and price conditions favor the return to a more normal monetary-policy position, according to a statement at the end of a two-day meeting in Tokyo.
The BoJ said it would encourage the overnight call rate to remain at effectively 0%, but would gradually seek to reduce the amount of cash it has been injecting into the banking system.
Bank of Japan Governor Toshihiko Fukui later told a press conference that the central bank sought to reassure financial markets that monetary conditions will remain stimulative, even as the central bank abandons what's been called the most aggressive monetary easing in the history of central banking.
"We find this shift of the Bank of Japan is extremely important and nothing to take lightly. It will have a far reaching effect in drying up the liquidity pool that may be a source of world funding," said analysts from KBC Securities.
Analysts from UBS added that the Tankan business sentiment survey in April now grows in importance, as markets try to figure out when the bank will hike actual interest rates.
Elsewhere, the Bank of England, as expected, held interest rates at 4.5%, for the seventh month in a row.
The British pound was last up 0.1% at $1.7387.
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