U.S. Trade Deficit Has Sharp Setback, Rises to $12.5 Billion

WASHINGTON — The U.S. trade deficit suffered a major setback in June, swelling to $12.5 billion, the government said today in a report that sent the dollar tumbling on foreign currency markets.

The surge in the trade deficit, a sharp 28.5% increase over the revised May imbalance of $9.8 billion, came after three consecutive months of improving trade figures, the Commerce Department reported.

June’s trading shortfall was the worst since February’s $14.4-billion deficit, which triggered a 100-point plunge in the Dow Jones industrial average when it was announced in April.

Negative Impact

The initial impact of the June deficit was also negative as the dollar fell sharply against all major currencies in hectic trading.

The dollar lost more than 1% of its value against the Japanese yen, British pound and West German mark immediately after the morning report, but then trimmed nearly half its losses.

Bond prices fell as well in the United States, pushing interest rates higher. A falling dollar hurts bond prices by frightening away foreign investors.

In a second report today, the government said that American industry operated at 83.5% of capacity in July, the highest level in more than eight years. The 0.4-percentage-point jump from the June operating rate was also viewed negatively by financial markets because it heightened concerns about growing inflationary pressures.

Significance Played Down

The Reagan Administration sought to play down the significance of the one-month increase in the trade deficit, saying that it did not change the fact that the U.S. trade deficit for all of 1988 will be sharply lower than the record imbalance suffered in 1987.

Analysts said the trade deficit has been a major blow to the dollar’s stability this year and shows that financial markets are still vulnerable to unexpected jolts from the monthly merchandise trade statistics.

“The June trade figure is a big disappointment and the implications are very scary for financial markets,” said Allen Sinai, chief economist for The Boston Co.

Sinai said that the trade figure would likely push the dollar lower, driving up the costs of imported goods and further intensifying inflationary pressures in the United States.

June Deficit Worse

The June deficit in merchandise trade was substantially worse than had been expected. Most economists had anticipated a deficit of around $10.9 billion, which would have matched the deficit as originally reported for May.

The May imbalance was revised downward to $9.8 billion, making it the best performance since an $8-billion deficit in December, 1984.

Even with the deterioration, the U.S. trade deficit for the first six months of the year was running at an annual rate of $140 billion, down sharply from the record deficit of $170.3 billion in 1987.

The deficit with Canada, America’s largest trading partner, climbed to $1.40 billion. The deficit with the countries of Western Europe rose to $1.9 billion, while the deficit with the newly industrialized countries of Taiwan, South Korea, Hong Kong and Singapore rose to $2.7 billion in June.