US stocks fell sharply last night in response to a record US monthly trade deficit. Having fallen by some 280 points at one stage, the Dow Jones average pulled back from a major collapse, but still closed down by 225 points at 10,598.47, a drop of 2.08 per cent.
As well as the marked rise in the deficit, the market was upset by the rise in the value of the yen against the dollar and by a profit warning from Apple Computer.
The US trade deficit widened to a record high in July at $25.18 billion (€24 billion), surpassing the previous month's record of $24.6 billion.
The move took markets by surprise. Economists had expected the trade gap to shrink slightly to $23.8 billion.
Commenting on the figures, Commerce Secretary Mr William Daley warned the deficit could grow even larger in the months ahead.
Imbalances with major trading partners increased in July, in some cases dramatically. The deficit with Western Europe ballooned by 38 per cent as US exports to the region declined and the gap with Canada surged by 28 per cent.
After the report was released, the dollar fell against the Japanese yen, dragging US bond prices lower, and helped pressure US stock prices.
US equities dealers said the share market opened under heavy pressure, and its losses continued to mount throughout the day.
They cited the Bank of Japan's lack of action to intervene in the currency markets in defence of the dollar, which triggered other worries, including fears that relations will be strained between the US and Japan at the meeting of Group of Seven finance ministers and central bankers this weekend. In addition, the weaker dollar intensified worries that the Federal Reserve's open market committee would be forced to raise interest rates to protect the US currency when it meets next on October 5th.
Although the surge reflected US economic vigour and strong consumer demand, compared to weakness in parts of Europe and Asia, experts said the deficit cannot be sustained and could undermine US prosperity.
"With each new record trade deficit, the dollar grows more vulnerable," said Mr Michael Fenollosa, an international economist with John Hancock Mutual Life Insurance Company. "Foreigners may pull their money out for better opportunities elsewhere and the dollar could take a beating."
Earlier, the dollar had already weakened as, overnight, the Bank of Japan declined to intervene in currency markets, a move that sent the US currency sliding against the yen, pushing it to 104.4.
Last week, the dollar hit a three-and-a-half-year low of 103.1 against the yen, as Japan's economic recovery showed promise.
However, yesterday, speculation about central bank intervention to depress the yen weakened.
The Bank of Japan announcement and the trade figures muted expectations that any kind of joint action would emerge at the G7 meeting. The US data helped the euro to rally briefly to a 10-day peak against the dollar at $1.05.
Meanwhile, raising concerns about corporate earnings, Apple said its fourth-quarter income would not meet Wall Street expectations because Motorola could not make enough of the chips that power Apple PowerMac G4 computers. Apple dropped $9.81 1/4 at $69 1/4
Meanwhile, traders watched the semiconductor industry to see how severely it would be impacted by the deadly earthquake that shook Taiwan, which accounts for 5 per cent of the world's DRAM chip-memory market.
"It's the weakening in the dollar, the disaster in Taiwan, Apple Computer, a record trade deficit. It's a lot of things," said Mr Peter Coolidge, senior equity trader at Brean Murray & Co on Wall Street.
"It's just uncertainty and not knowing the situation that has the market jittery."
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