Trade Gap Narrows but Remains Second Highest

The U.S. trade deficit (search) narrowed more than expected in July, but still was the second highest on record at $50.1 billion even though imports dropped for the first time in 10 months and exports leapt higher, the U.S. government said on Friday.

The trade gap declined nearly 9 percent from a revised estimate of $55.0 billion in June for the biggest monthly decline since December 2001, the Commerce Department (search) said. Analysts surveyed before the report had pegged the July trade deficit at $51.75 billion.

The near record deficit could renew pressure on the dollar, which has traded in broad range between about $1.1750 and $1.2450 against the euro the past six months.

On Thursday, San Francisco Federal Reserve Bank President Janet Yellen said any turnaround in the U.S. trade deficit must involve the dollar.

Imports dipped 1.4 percent to $146 billion. A drop in oil import prices to $33.28 per barrel after eight consecutive monthly increases helped lower the overall import bill. Oil prices soared to nearly $50 a barrel in August on U.S. futures markets.

Exports increased 3.0 percent to $95.9 billion, or just $1 billion shy of the record set in May. The rebound included an uptick in civilian aircraft sales, which had fallen sharply in June and helped pushed the trade deficit to a record that month.

U.S. exports of autos and auto parts also set a record in July.

Meanwhile, the politically sensitive U.S. trade deficit with China set another monthly record at $14.9 billion as imports increased 3.7 percent from June and exports fell 2.6 percent, the government said.

U.S. manufacturers estimate the 2004 trade gap with China will surpass $150 billion, easily topping the record of $125 billion set last year. They blame China's policy of pegging its currency against the dollar for the soaring bilateral deficit. Economists estimate the yuan is undervalued by 15 to 40 percent because of the peg.

On Thursday, the U.S. Trade Representative's office rejected a petition from labor, textile and steel groups seeking a challenge of China's currency policies at the World Trade Organization. The Bush administration said it is making progress on the diplomatic front persuading China to move to a floating exchange rate.