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No Quick Fix for Trade Gap

The declining dollar was supposed to make the trade deficit smaller. So why does it seem to be having the opposite effect?

In November, the deficit soared to a record $60.3 billion, up from $56 billion in October and well above the $54 billion estimate projected by economists.

"The trade imbalance has not yet even begun to correct," said Sherry Cooper, chief economist at BMO Nesbitt Burns.

When the dollar falls, import prices go up and export prices go down. In theory, this should reduce domestic demand for overseas goods and increase overseas demand for U.S. goods. Yet imports climbed 1.3% in November to a record $155.8 billion and exports fell to a five-month low of $95.6 billion.

"The decline in the dollar is not enough to dissuade the U.S. consumer from buying imports," said Drew Matus, an economist at Lehman Brothers. "Secondly, and more disturbingly, there seems to be a lack of demand from the rest of the world."

The trade gap with Canada and Japan surged 28% and 24%, respectively, in November, while the deficit with Western Europe rose 10% after a 27% jump in October.

Until economies abroad strengthen, Matus said U.S. exports will remain weak and imports will be strong. Indeed, he said, the U.S. deficit could potentially rise from an already elevated level.

"It could get worse if global demand doesn't pick up," he said. "But at some point, it will get better simply because the dollar will inflict pain on U.S. consumers who choose to buy imports over domestically produced goods."

Oscar Gonzalez, an economist at John Hancock Financial Services, said he thinks another 5% to 10% drop in the dollar is needed to reverse the external imbalance. The dollar fell against the yen and the euro Wednesday. Over the past three years, the U.S. dollar index has skidded almost 30%.
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