A dive by the dollar against the euro over the last 12 months has created dire predictions aplenty, with gloomsayers offering predictions of wholesale dumping of American assets.

To the surprise of the pessimists, though, the greenback in recent weeks has managed to recoup about 4 percent of its losses, even though the Federal Reserve ratcheted short-term interest rates to a 45-year low.

Yet the dollar’s rebound is no sure thing, and it remains nearly 30 percent below its peak against the euro. In recent days, it has wobbled. Meanwhile, the global economy is so weak it is unlikely to stir up much additional buying for U.S. exports.

That brings us to Friday’s report of the May trade deficit. Economist Sung Won Sohn expects it to widen to about $42.5 billion from $42 billion a month earlier.

“In the long run, the size of the trade deficit is bound to do additional damage to the dollar,” said Sohn, of Wells Fargo & Co. in Minneapolis. “For now, however, the currency is in a tug-of-war between the steep trade shortfall and rising U.S. economic growth.”

There is more concern about economic conditions in Europe than here, Sohn said, because Germany’s weakness threatens the rest of the continent.

“Clearly, in the short run, the economy here looks better than Europe, and better than Japan, as well,” he said.

For both Europe and this country, Sohn said, the biggest problem is a surge of goods pouring out of China. As long as China pegs its currency to the dollar, he added, a weaker greenback won’t help that part of the trade equation.

Talk of deflation has subsided substantially in the last month, following comments by Fed Chairman Alan Greenspan that he and other central bankers harbor some concerns about a general price decline.

Additional data rolls out Friday, with the June producer price index. Fears of deflation were fanned by the report for April, which showed a steep drop of 1.9 percent, followed by slippage of 0.3 percent in May.

Economist John Silvia is looking for the index for June to show a gain of 0.5 percent, while noting that the entire gain will be due to rising energy prices. Otherwise, wholesale prices last month were flat.

“There has been a spike in the price of natural gas. Other energy prices have been extremely volatile since the Iraq war,” said Silvia, of Wachovia Securities in Charlotte, N.C.

Aside from energy, he said, price increases are taking place in health care and services, but manufacturers remain strapped.

“Any company that sells commodity goods in global markets, such as computer chips, is finding itself with no pricing power,” Silvia said. “For such companies and their workers, deflation remains a real concern.”

To look at recent reports on consumer credit, it would appear that Americans were swearing off plastic. All through the winter, the pace of borrowing showed a lackluster pace, culminating with a rise of only $1.1 billion in March.

The drought ended in April, however, with a credit growth spree of $10.7 billion. A fresh report is due out Tuesday, and is likely to show a gain of about $4 billion.

Analysts said consumers are moving beyond so-called revolving charge accounts and credit cards, with many using their real estate as a piggy bank to buy cars, furniture and other major items through a variety of home-equity loans and other devices.

The stock market sometimes loses track of its summer rally somewhere between the major holidays. Last year, the period between Memorial Day and Independence Day saw the Dow Jones industrial average drop by more than 1,000 points, or just more than 10 percent. Within weeks, it lost nearly another 1,500 points.

This year has been a different story, with the Dow up about 500 points since Memorial Day, or more than 5 percent. That places the index at nearly the exact spot where it stood a year ago.

Next up: an outpouring of second-quarter corporate profits, beginning on Monday. Analysts are hoping for a year-over-year gain of about 5 percent. Anything to the upside could stir further buying on Wall Street, but investors will be wary of earnings disappointments.

—

(c) 2003, Chicago Tribune.

Visit the Chicago Tribune on the Internet at http://www.chicago.tribune.com/

Distributed by Knight Ridder/Tribune Information Services.

AP-NY-07-03-03 1818EDT