Dollar rallies as US trade deficit hits 18-month low

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The Independent Online

Economics Editor

The dollar rally was underpinned yesterday by renewed hopes of imminent interest rate cuts in Germany and favourable trade movements in the US and Japan. The Japanese current account surplus shrank for the second year running and the US trade deficit improved sharply to its lowest for a year and a half.

By the close of trading in London, the dollar had risen by half a yen. It also gained over half a pfennig against the German mark as a fall in manufacturing orders in December brought hopes of swift interest rates cuts.

These were helped by comments by a member of the Bundesbank Council backing further monetary easing. Hans-Jurgen Krupp said that Germany could be facing recession and that the underlying trend of the money supply was weak. "This could well make further rate cuts necessary," he said.

In the post-war period, the Bundesbank has only once cut the floor discount rate below its present level of 3 per cent. However, Mr Krupp said that "one shouldn't jump to the conclusion that further interest rate cuts are ruled out" as a result.

Manufacturing orders in Germany shrank by half a per cent in December. An increase in export orders was more than offset by a fall of 2.4 per cent in domestic orders. Overall orders were down by 6.4 per cent compared with a year earlier.

The Japanese current account surplus dropped by 15 per cent in 1995 to $110.4bn. In yen terms it shrank by 22 per cent. The trade surplus also fell for the first time in five years, by 8 per cent to $134.8bn from last year's record $146bn. Higher imports of personal computers, cars and semiconductors and lower exports of cars helped push the deficit down.

Meanwhile, the US trade gap of $7.1bn in November was much better than expected, and the lowest deficit since March 1994. The markets had been forecasting $8.4bn.

The improvement in the trade gap was interpreted as further evidence of a slowdown.

"Although the slowdown in imports boosts growth on an arithmetic basis," said David Bloom, US economist at James Capel, "it may be due to destocking and hence weak domestic demand. This would be felt in the first and second quarters. It is unlikely the US would be able to export itself out of its current weakness since its main trading partners are also suffering slowdowns."