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NewsFlash: June 16, 2006 
 

Trade deficit improves, but overvalued dollar needs careful management

Today’s announcement that the trade deficit improved in the first quarter of 2006 proves the reduction in the value of the U.S. dollar is beginning to make a difference, according to today’s  Current Account Picture by EPI economist Robert Scott.  Amid this good news, Scott cautions that the depreciation of the overvalued dollar should take place in an orderly fashion, as domestic investors are now rapidly moving their money to other countries. These outflows reached a record $1.4 trillion at an annual rate in the first quarter. 

“Such hot money outflows are the harbinger of sharp currency declines, and could lead to wrenching changes in the economy,” warns Scott.  “If governments fail to control the required depreciation, markets could burst the dollar bubble.”

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