The dollar index rose 0.08% against a basket of major rivals today to 99.608, but remains 8% lower since the start of the year as investors seek alternatives to US assets, impacted by the trade wars.

US Economy Faces Pressure Despite Optimism

Recent data showed US durable goods orders fell in April by the fastest pace in six months, as the trade war starts to impact the economy and corporations.

ING Banks analysts wrote in a memo that more positive surprises in data are needed to restore confidence in US growth, with deficit worries persisting for the time being.

Additional Support from Trumps Decisions

The dollar was further boosted by US President Donald Trumps decision to delay EU tariffs.

Reuters sources said European officials asked major corporations and CEOs in the EU to provide details on their US investments as Brussels intensifies trade talk with Washington.

Sterling, Aussie, and Kiwi

Sterling rose $1.3506 and remained near a three-year high marked on Monday.

As for the Australian dollar, it hit $0.6445 against the greenback after data showed inflation held steady in April, underpinning hopes for a rate cut.

The New Zealand dollar rose 0.37% to $0.5971, after the central bank said it might approach the end of the policy easing cycle after an expected 0.25% rate cut.

Does Reduction of the Trade Deficit Require Weakening the Dollar?

If the US is serious about reducing its significant trade deficit, it might have to weaken the US dollar considerably, but history shows that something like that is highly unlikely.

Reducing the trade deficit is a major target for President Trump, as he views the deficit as a result of decades of other countries preying on US wealth.

Dollar Moving in Desired Path

If the Trumps administration indeed intends to weaken the dollar, its moving in the right path, as the dollar is 10% weaker this year amid growing concerns about US fiscal policies and the end of American Exceptionalism as some investors view it.

However, its worth noting that the dollar fell 15% during Trumps first term and it didn't impact the trade deficit, which remained between 2.5% and 3.5%.

Historys Burden: Could the Deficit be Squashed without Recession?

Reducing the US trade deficit is a huge challenge, and outright eliminating it without a recession would be a historic task.

The US has sustained a chronic trade deficit for half a century due to increasing consumer demand on imported products.

The only exception was in the third quarter of 1980, when the US marked a slight trade deficit at 0.2% of GDP, with similar small quarterly surpluses in 1982, 1991 and 1992, mostly due to a sharp economic slowdown or a recession that tanked imports.

Dollars Role in Balancing Trade

The dollar played a pivotal role in reducing the deficit only once, during 1985-1987, when the dollar tumbled 50% following the Plaza agreement that aimed to weaken it after a sharp increase in the early eighties, and indeed, the deficit plunged by the early nineties.

However, it doesnt mean that even sharp decline by the dollar leads to deficit reduction, with the greenback falling by 40% between 2002 and 2008, but the deficit kept rising to a record of 6% of GDP in 2005.

During the last 50 years, the dollar index sustained only four 20% drops, none of them led to an improvement in the trade balance.

Could the Deficit Really Disappear?

The US administration admits the dollar remains historically strong according to several measures, with the official pressure from Trumps government mounting on the dollar value.

How much would the dollar need to fall to reduce the trade deficit amounting to $918 billion last week, about 3.1% of total GDP?

Some analysts believe that a 20-30% drop in dollars value could just be enough to bring the deficit to parity once more in upcoming years, but such a step is historically very difficult without a recession.

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