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%.

"Right now we have a voracious appetite and the rest of the world keeps setting the table -- and paying the bill -- for us," he said. "The typical reversal begins with a combination of slower GDP growth, rising interest rates, and a depreciating exchange rate."

Economists estimate that GDP growth will be cut by about half a percentage point in the fourth quarter as a result of the burgeoning deficit. And the economy could take a further hit in 2005.

"The much touted 3.5% GDP forecasts for the U.S. economy in 2005 could be cut down by as much as 0.7% to 0.8%," said Ashraf Laidi, chief currency analyst at MG Financial.

Although the rise in imports recently is likely to raise fears about higher inflation, economists say there's no reason to panic.

"We haven't yet seen a huge feed-through from import prices," noted Matus. "I suspect importers and exporters are squeezing their margins in order to keep price increases from flowing through to the consumer."

Ian Shepherdson, chief economist at High Frequency Economics, said he believes the deficit probably narrowed by as much as $5 billion in December as oil prices declined. Oil imports surged 17.7% in November.

In addition, he said the decline in exports "makes no sense" and was probably affected by "some sort of seasonal adjustment problem."

The trade numbers Wednesday are likely to increase tensions between the U.S. and China. Although the gap with China narrowed for the first time in nine months in November, it still stands at a whopping $147.7 billion for the year.

The U.S. has criticized China for keeping its currency pegged to the dollar. If the Chinese yuan were allowed to float freely, economists say its value would shoot up, making exports from that country more expensive.

While this could help to narrow the trade gap, it also could mean higher U.S. interest rates, as China's central bank has been using the profits from exports to buy government Treasuries.