Will America's Unbalanced Trade Doom the Dollar?

Concerns that the U.S. trade deficit will drag down the dollar are overdone

- Jon Sindreu

The Trump administration and Wall Street haven't exactly seen eye to eye, but they are starting to agree on one thing: America's trade deficits are a problem and the dollar might not stabilize until imports and exports realign. But in reality, it is more likely that the currency's fate depends on the success of the "Magnificent Seven" stocks.

In April, the trade deficit halved, official data showed Thursday. This was largely because companies had stocked up in March ahead of "Liberation Day" tariffs, but the 19.9% drop in imports still exceeded economists' expectations. Declines in imports of cars, cellphones and other goods suggest tariffs are helping narrow the deficit.

With the WSJ Dollar Index down 7% this year, many investors who are concerned about the Republican Party's tax-and-spending bill see a connection between the trade and fiscal deficits, echoing comments by Treasury Secretary Scott Bessent.

"America's net external asset position is the best metric to measure fiscal space, and this is on a rapidly deteriorating path," Deutsche Bank economist George Saravelos recently wrote to clients.

Across wealthy countries, the cost of government borrowing tracks the balance of assets minus liabilities with the rest of the world, called the net international investment position. Switzerland, a net holder of foreign assets, has 10-year yields of 0.4%. The U.S., by contrast, is the biggest net external debtor among top nations, with a negative investment position equal to 88% of gross domestic product last year. It borrows at 4.5%.