Wider US Trade Deficit Helps Dollar Pare Gains

With some positive headlines coming from Europe, including talk of ECB bond purchases after 15 week hiatus, and the US trade figures, the euro bounced to about $1.4020, but selling into bounces is still the most likely course as a resolution of the European debt crisis remains elusive.

The US trade deficit for May came in well above expectations at $50.2 bln. The consensus was for a shortfallIt is the widest deficit since Oct 08. In real terms, which is what is used for GDP calculation purposes, rose to $47.8 bln from $43.9 bln in May. The average monthly shortfall in Q2 (April and May) is just shy of $46 bln, closer to $44 bln.

In Q1 it was closer to $50.5 bln, so the external balance appears to be making a contribution to Q2 GDP, but not as big as extrapolating from April would have suggested. In the first quarter, net exports boosted GDP by about 0.15 percentage points.

It is often not appreciated how concentrated in terms of products is the US trade deficit. Excluding petroleum, the trade deficit in May was just below $20 bln.

Another $7 bln of the trade deficit is accounted for by what the US government called advanced technology. This seems to be a function of globalization of the production process (think ipads).

It is also not often appreciated that the US services foreign demand not so much by exporting, though it is the world's third largest exporter behind China and Germany. The main way the US services demand is to produce locally and sell locally. The sales by majority owned affiliates of US companies in foreign countries exceeds US exports by a function of nearly 4 to 1.