Latest news with #dollarWeakness
Zawya
6 days ago
- Business
- Zawya
Historic dollar fall needed to eliminate US trade deficit: McGeever
(The opinions expressed here are those of the author, a columnist for Reuters.) ORLANDO, Florida - If the United States is to significantly reduce or, whisper it, eliminate its trade deficit, the dollar will probably have to weaken a lot. How much is unclear, though, as history shows large dollar declines are rare and have unpredictable consequences for trade. Reducing the U.S. trade deficit is the key goal of President Donald Trump's economic agenda because he believes it reflects decades of other countries "ripping off" America to the tune of hundreds of billions of dollars annually. Stephen Miran, chair of the Council of Economic Advisers, published a paper in November titled "A User's Guide to Restructuring the Global Trading System" in which he argued that the dollar is "persistently over-valued" from a trade perspective. "Sweeping tariffs and a shift away from strong dollar policy" could fundamentally reshape the global trade and financial systems. If a weaker exchange rate is the Trump administration's goal, it is on the right track, with the greenback down nearly 10% this year on the back of growing concerns over Washington's fiscal trajectory and policy credibility as well as the end of "U.S. exceptionalism" and the "safe haven" status of Treasuries. But it is good to remember that a 15% fall in the dollar during Trump's first term had no impact on the trade deficit, which remained between 2.5% and 3.0% of GDP until the pandemic. Making a dent in the U.S. deficit will therefore require a much bigger move. THE WEIGHT OF HISTORY Reducing the trade deficit will be a challenge, eliminating it without a recession, a historic feat. The United States has run a persistent deficit for the past half-century, as insatiable consumer demand has sucked in goods from around the world and voracious appetite for U.S. assets from overseas has kept capital flowing stateside. The only exception was in the third quarter of 1980, when the U.S. posted a slender trade surplus of 0.2% of GDP, and trade with the rest of the world almost briefly balanced in 1982 and 1991-92. But these periods all coincided with - or were the result of - sharp slowdowns in U.S. economic activity that ultimately ended in recession. As growth shrank, import demand slumped and the trade gap narrowed. The dollar only played a significant role in one of them. In 1987, the trade gap was a then-record 3.1% of GDP. But it had almost disappeared by the early 1990s, largely because of the dollar's 50% devaluation from 1985-87, its biggest-ever depreciation. That three-year decline was accelerated by the Plaza Accord in September 1985, a coordinated response between the world's economic powers to weaken the dollar following its parabolic rise in the first half of the 1980s. But that does not mean large depreciations always coincide with reductions in the trade deficit. The dollar's second-largest decline was a 40% fall between 2002 and mid-2008, just before Lehman Brothers collapsed. But the U.S. trade deficit actually widened throughout most of that period, peaking at a record 6% of GDP in 2005. While it had shrunk by more than three percentage points by 2009, that was due more to plunging imports during the Great Recession than the exchange rate. These two episodes of deep, protracted dollar depreciation stand out because over the past 50 years, the dollar index has only had two other declines exceeding 20%, in 1977-78 and the early 1990s, and a few other slides of 15-20%. None of these had any discernible impact on the U.S. trade balance. DEFICIT TO 'VANISH'? The U.S. administration is correct that the dollar is historically strong today by several broad measures. Given that President Trump and Treasury Secretary Scott Bessent seem intent on rebalancing global trade, pressure on the greenback looks unlikely to lift any time soon. But how much would the dollar have to fall to whittle away the yawning trade deficit, which last year totaled $918 billion, or 3.1% of GDP? Hedge fund manager Andreas Steno Larsen reckons a 20-25% depreciation over the next two years would see the deficit "vanish", while Deutsche Bank's Peter Hooper thinks a 20-30% depreciation could be enough to "eventually" narrow the deficit by about 3% of GDP. "This means that a significant reversal of the roughly 40% appreciation of the dollar in real (price-adjusted) terms against a broad set of currencies since 2010 could be sufficient to get the current deficit back to a zero balance," Hooper wrote last week. History suggests this may be challenging without a severe economic slowdown. But that's a risk the administration seems prepared to accept. (The opinions expressed here are those of the author, a columnist for Reuters)
Reuters
26-05-2025
- Business
- Reuters
Traders to look out for rupee extending rally; bond yields may see uptick
MUMBAI, May 26 (Reuters) - Traders will gauge likelihood of the Indian rupee extending its rally this week as reignited worries about U.S. trade tariffs, alongside lingering fiscal concerns hurt the dollar, while bond yields may move up after the central bank's surplus transfer. The rupee closed at 85.2125 on Friday, posting its biggest single-day gain in more than two years, and strengthened 0.3% week-on-week. Alongside a rally in Asian currencies, heavy dollar sales from foreign banks and cutting of speculative bearish bets against the rupee contributed to the rally, traders said. The dollar, meanwhile, weakened against most currencies on Friday after U.S. President Donald Trump recommended 50% tariffs on European Union imports from June 1 and said he was considering a 25% tariff on smartphones made outside the U.S. The fresh tariff threats roiled global markets and deepened the dollar's losses which ended down by about 1.8% on the week against major peers. "Escalation – de-escalation and now re-escalation of President Trump's war on trade is going to be the theme that drives markets next week," ING Bank said in a note. Back home, India's January-March growth data, due on Friday, will be in focus. Year-on-year gross domestic product growth is expected to come in at 6.7%, per a Reuters poll. In the near-term, the rupee is expected to face resistance to further gains near 84.94, said Dilip Parmar, a foreign exchange research analyst at HDFC Securities. U.S. Personal Consumption Expenditure (PCE) inflation data for April, due on Friday as well, may offer cues on the impact Trump's tariff policies are having on prices in the world's largest economy. India's 10-year benchmark 6.33% 2035 bond yield eased marginally last week, and ended at 6.2107% on Friday. Traders anticipate the yield to move in the range of 6.18%-6.26% this week. The yield on the 6.79% government bond maturing in 2034 ended at 6.2520% on Friday. The Reserve Bank of India's board approved the transfer of 2.69 trillion rupees ($31.58 billion) as surplus for the fiscal year ended March, up from 2.11 trillion rupees last year. Analysts' estimates, however, had ranged between 2.7 trillion rupees and 4 trillion rupees. In fiscal year 2024, the RBI had transferred a surplus of 2.11 trillion rupees. "We could see some upward move in the immediate aftermath on Monday, but major focus would shift on growth data," a trader with a private bank said. The RBI is largely expected to cut its key interest rate for a third consecutive time to 5.75% at its monetary policy meeting on June 6. "With growth below potential and inflation durably aligned to target, we expect policy rates to be lowered into the accommodative zone. We expect an additional 100 bps of rate cuts to a terminal policy rate of 5.00% by end-2025, more than consensus," Nomura economists said. KEY EVENTS: India ** April industrial output - May 28, Wednesday (4:00 p.m. IST)(Reuters poll - 2%) ** April fiscal deficit - May 30, Friday (3:30 p.m. IST) ** January-March GDP growth - May 30, Friday (4:00 p.m. IST)(Reuters poll - 6.7%) U.S. ** April durable goods - May 27, Tuesday (6:00 p.m. IST) ** May consumer confidence - May 27, Tuesday (7:30 p.m. IST) ** January-March GDP second estimate - May 29, Thursday (6:00 p.m. IST)(Reuters poll -0.3%) ** Initial weekly jobless claims for week to May 19 - May 29, Thursday (6:00 p.m. IST) ** April personal consumption expenditure index, core PCE index - May 30, Friday (6:00 p.m. IST) ** May U Mich sentiment final - May 30, Friday (7:30 p.m. IST) ($1 = 85.1720 Indian rupees)
