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US June trade deficit shrinks on weak dollar

4 min

A weak dollar pushed US exports up and brought imports down, thereby helping the US economy offset record-high crude oil prices in June as the trade deficit narrowed for the second consecutive month.

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The US trade deficit shrank unexpectedly in June as a weak dollar stoked exports, offsetting record-high crude oil imports and a growing shortfall with China, official data showed Tuesday.

The June trade deficit shrank a hefty 4.1 percent to 56.8 billion dollars, the smallest gap since March, the Commerce Department said.

It was the second consecutive month the trade gap narrowed, and overturned market expectations it would swell to 61.9 billion dollars.

The Commerce Department revised lower the May trade deficit to 59.2 billion dollars from its initial estimate of 59.8 billion.

The weak dollar helped drive exports 4.0 percent higher to 164.4 billion dollars, while imports increased by a modest 1.8 percent to 221.2 billion dollars as the world's largest economy faced housing and financial headwinds.

"US growth is doing much better than domestic spending would indicate, both because exports are booming and because some of the weakness in domestic demand is being passed on to the rest of the world through lower imports," said Nigel Gault, economist at Global Insight.

Crude oil and Chinese imports accounted for almost the entire June trade deficit.

At a record 117.13 dollars a barrel on average, the oil deficit hit 36.4 billion dollars, a record high that represented more than half the trade deficit.

Oil prices which had surged since February 2007, when a barrel was worth 50.64 dollars, have fallen recently, which should ease pressure on US imports.

By contrast, the trade deficit in non-petroleum products was the smallest since February 2003.

The trade gap with China rose by 1.8 percent to a seasonally adjusted 21.4 billion dollars from 21.0 billion in May. Critics accuse China of manipulating its yuan currency to unfairly maintain a trade advantage that has cost thousands of US jobs.

The United States reduced imports in nearly all categories, except commodities, and exported record amounts of industrial supplies and materials, food and beverage products and consumer goods.

The dollar's strengthening in recent weeks and the slowing global economy were expected to weigh on US exports.

The euro fell below 1.50 dollars Friday for the first time since February amid mounting signs of a sharp slowdown in the 15-nation eurozone.

"While rapid export growth has been a crucial support to the US economy, that now appears under threat, as the evidence from Europe and Japan shows a rising threat of recession," Gault said.

Joel Naroff at Naroff Economic Advisors said the trade report showing the US economy is "quite weak" would prompt the Federal Reserve to maintain interest rates in the near future.

"We are not buying a whole lot of goods from anywhere. ... but with a lessening of inflation pressures from the drop in oil prices and the firming of the dollar the Fed will likely stay on hold for quite a while," Naroff said.

Lifted by the dollar's weakness in June, US exports to the European Union jumped 4.5 percent to a record seasonally adjusted 8.2 billion dollars.

The US trade deficit with Canada ballooned by 33 percent to 7.2 billion dollars. With Japan, the gap widened dramatically to 6.1 billion dollars from 5.0 billion in May.

The deficit with the countries of the Organization of the Petroleum Exporting Countries edged 0.9 percent higher to a record 18.1 billion dollars.

In the first six months of 2008, the US trade deficit reached 351.4 billion dollars, undercutting the 358.4-billion-dollar shortfall in the same period in 2007 and putting the US on track to reduce the gap for the second year in a row.

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