Dollar falls on record trade gap

Imports soared to $118bn as Americans snapped up foreign-made cars, TVs and clothes.

The deficit rose by 4.1% higher in May, with imports growing at twice the pace of exports, the Commerce Department said.

Exports rose by just 0.7% to $80.6bn, as the weakness in the world economy restrained export growth.

The trade gap with China widened to $8.1bn, showing China was still benefiting from its membership of the World Trade Organisation.

Dollar under pressure

The announcement further undermined the dollar, which has weakened in recent weeks as shares have plunged amid fears of corporate scandals.

The euro rose to a level of $1.0155 shortly after the data was released.

The weaker dollar in turn raised expectations of another gloomy day for shareholders.

"The dollar is the focus of attention of a lot of investors right now," said Gary Thayer, chief economist at AG Edwards in St Louis.

"If the dollar had held up well, that would have been a good development for stocks."

The dollar also weakened against the yen, which was trading at a level of 115.64 to the dollar shortly after the news.

The strong yen puts in jeopardy the prospects for an export-led recovery in Japan, and may lead the Japanese central bank to intervene further to try and weaken its currency.

Financing the gap

The US has been running a huge trade deficit for several years, but up to now it has avoided a run on the dollar because foreign investors were happy to make up the shortfall by buying US stocks and bonds.

But the falling US stock markets have made foreign investors reluctant to put more money into the pot.

In the long run, the weaker US dollar should boost US exports by making them cheaper and more competitive - but that could take years to come about.

Meanwhile, the huge trade deficit is adding to protectionist pressures in the US Congress, which is considering a bill to allow the President enhanced authority to negotiate a new trade deal.