Dollar drops 1.5 cent against euro

WORSE than expected trade data from America caused the dollar to sink by 1.5 cent against the euro yesterday.

The United States’ trade deficit, which measures the amount by which imports exceed exports, went up 19% in June after exports showed the biggest drop in three years. The deficit was aggravated by imports reaching an all-time high in the same month and stood at $55.8 billion in June, 19% higher than the previous month.

Imports rose 3.3% during the month to a record $148.6bn, which was the largest single increase since November 2002. But exports fell 4.3% to $92.8bn, a number that disappointed the markets after rising 2.7% the previous month. American exports have been lower than imports every month since the early 1990s.

Financial markets tend to react to an increasing deficit by selling dollars, as investors expect greater demand for foreign currencies from Americans seeking to import goods from abroad. The euro responded by hardening to $1.235, a cent-and-a-half higher on the day, while sterling was up almost 3c to $1.8424.

Ulster Bank economist Niall Dunne said the dollar could sink further on Monday, when the US Treasury publishes new information on combined trade and investment flows to and from the US. Mr Dunne said the euro could test the $1.24 level at that stage. The level of foreign investment into the US has been falling steadily over the summer and a further fall is expected next week.

There was further bad news from America yesterday when a key survey of consumer sentiment showed a sharp fall. The University of Michigan’s monthly index fell from 96.7 in July to 94.0 in August. Analysts had expected the index to remain broadly stable. Rising oil prices and interest rates, coupled with US stock markets being at their lowest level for nine months, are believed to be the major concerns weighing on consumers’ minds.

Mr Dunne said yesterday’s data would be likely to result in the authorities cutting their quarterly growth forecasts.