Markets Send Dollar Higher Despite Troubling News

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It was a confusing day in the financial markets. The day started with a worse-than-expected report on the trade deficit. Normally that would put downward pressure on the dollar, but today the dollar went up. The greenback got a boost from Fed Chairman Ben Bernanke, who said the run-up in oil prices is creating a new opportunity for a spike in inflation.


This is ALL THINGS CONSIDERED from NPR News. I'm Michele Norris.


And I'm Melissa Block.

The U.S. trade gap grew in April by the biggest amount in more than a year, the government said today. Ordinarily, you might think that would be bad news for the dollar, but not today. In fact, the greenback rose in value.

NPR's Frank Langfitt explains why.

FRANK LANGFITT: Okay, first, what happened with the trade gap. In April, U.S. exports were great. A weak dollar continues to make American goods cheaper to sell overseas, and that helped push exports to an all-time high - $155 billion. Nigel Gault works for Global Insight, a financial analysis firm. He lists some of the big export winners for April.

Mr. NIGEL GAULT (Economist): We had very strong export increase for civilian aircraft, agricultural machinery, industrial engines, computers.

LANGFITT: And the sale of all those goods helps support jobs here at home. Now the bad news: The high price of oil wrecked the party. The U.S. spent so much on imported oil in April that it wiped out all the gains from exports. In the end, the trade gap was actually $4.4 billion more than the month before. Again, Nigel Gault.

Mr. GAULT: We were actually paying much more for our imports than we used to. So the price of imports is going up much faster than the price of exports.

LANGFITT: This is where the Federal Reserve comes in. The Fed's main job is to control inflation. Expensive oil and a week dollar are pushing up prices. So on Monday, Fed chair Ben Bernanke did something unusual. He focused on the weak dollar and how it's affecting inflation. Meg Browne, a currency strategist with the investment bank Brown Brothers Harriman, says the Fed worries about a scenario like this.

Ms. MEG BROWNE (Currency Strategist): So oil prices and commodity prices are rising, so then what happens? Some of that gets passed on from wholesale prices to the consumer, and the consumer's already feeling some of this. And then what happens? Well, maybe people start suggesting that wages should be raised. And you begin to have a spiral higher and higher.

LANGFITT: The Fed can strengthen the dollar by raising interest rates. That would boost demand around the world for dollars and drive the value up. After Bernanke spoke Monday, the dollar rebounded. In anticipation of a rate hike, the dollar rose to a three-month high against the yen. Browne said raising interest rates right now is a trade-off. In the short run, people holding adjustable-rate mortgages could suffer.

Ms. BROWNE: It could boost that rate and then the mortgage payments made each month would be higher. That's not a pleasant thought. But what a Federal Reserve rate hike would do in a long run is to try and damp the acceleration in prices.

LANGFITT: And with oil at more than $130 a barrel, avoiding runaway inflation may be the most urgent priority.

Frank Langfitt, NPR News, Washington.

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