The US trade deficit widened to a record $68.9 billion in October 2005 according to the US Commerce Department’s December report, setting a new high for the second month in a row. The individual US deficits with China, Europe, Mexico, Canada and the Organization of Petroleum Exporting Countries all reached new highs. The report, which was released in December, pushed down the dollar, which already was getting skittish at the prospect of coming to the end of a long string of monthly Federal Reserve interest rate increases.
But do record trade deficits really matter, or are they merely a reflection of a strong economy? US net portfolio investment from abroad reached a record $106.8 billion in October, enabling the US to easily fund its record current account deficit with capital flowing into the country from foreign investors, including central banks and oil exporters.
Most economists say the dollar, which showed surprising strength in 2005, will probably fall again in 2006, as the US rate advantage with Europe and much of the rest of the world reaches a peak. A weaker dollar could boost exports and help keep the US economy rolling along, as long as the wheels don’t come off.