The US trade deficit hit a record US$617.7 billion in 2004, according to the US Commerce Department. Brad Setser sees nothing that can reverse the rising trend in the near future and thinks that the 2005 trade deficit may hit US$733 billion. That is obviously not good for the US dollar.
Speaking of the US dollar, Peter Schiff, CEO and chief global strategist at Euro Pacific Capital, says that there is no need to fear that dollar-selling has reached irrational extremes as there is, in fact, no effective bearish consensus on the currency.
Having just returned from the Orlando Money Show, I can assure anyone that the position that dollar bearishness has risen to the height of fashion is completely contradicted by reality. While my two presentations on the bearish case for the dollar were well attended they were greatly over-shadowed by those espousing the opposite point of view. Much more numerous in numbers, the dollar bulls were assigned the biggest rooms and spoke to significantly larger audiences. One attendee commented that my bearish outlook contradicted every other presentation he heard. Further, as hundreds of investors passed by my booth each day, those who had taken any action at all with respect to non-dollar investments were few and far between.
The fact is that despite all the talk of dollar weakness, there has been very little action on the part of dollar holders to do anything about it... In order for a mania to exist in an asset class, it is necessary for there to be wide-spread ownership in the asset, and a general belief among those buying it that its price can only go higher. For there to be a mania in non-dollars, the average American would have had to have already sold his dollars. How many people do you know who have bank accounts in foreign currencies?
Indeed, the biggest players nowadays in the foreign exchange market, the Asian central banks, continue to buy US dollars, as I have mentioned before.
So it is unlikely that the US dollar has hit an extreme low. It is conceivable, though, that it may have hit an intermediate bottom, especially if the US economic slowdown turns out to be particularly pronounced and reduces imports and trims the trade deficit, or at least slows its growth.
As Setser warns: "[B]arring a major change in US economic conditions, or a big fall in oil, there is little doubt the trade deficit will keep on growing in 2005".