The United Kingdom just measured its greatest trade deficit since records began in 1697. The British Office of National Statistics recorded a deficit of £7.8 billion (us$16.5 billion) for the month of September, up from £6.9 billion in August.

Although UK trade deficits aren’t new, they have rapidly worsened. The deteriorating trade gap this year to date compounds last year’s record deficit of £84.3 billion (us$174.5 billion).

A major cause of the recent deterioration in the UK’s trade position is rapidly changing exchange rates—meaning the U.S. dollar’s slide in value over the past two years.

Although the media constantly reports the surge in the pound’s value against the U.S. dollar, don’t be deceived into thinking that the pound represents strength. For example, Bloomberg recently reported that the pound reached $2.1162, which was “the highest since 1981.” In actuality, the pound’s rise is primarily against the U.S. dollar and dollar-linking currencies. When compared to euros, Canadian and Australian dollars, or Norwegian krona, the pound has actually fallen in value.

The falling U.S. dollar impacts British trade in several ways.

First, demand for British goods in America falls because the weaker dollar makes pound-denominated products more expensive. Conversely, the weaker U.S. dollar means that Britons can import more dollar-priced goods.

Second, demand for British goods in countries that link their currencies to the U.S. dollar also falls. Countries like China (which has a loose dollar link), Saudi Arabia, Belize, Venezuela, Jordan and Hong Kong all peg their currencies to the dollar. When the dollar falls, so do their currencies. Consequently, as the dollar falls, British imports to these countries become more expensive, and imports from these countries to Britain become less expensive. Thus, as the dollar falls, British trade losses intensify.

Peter Dixon, an economist at Commerzbank ag in London, summarized Britain’s trade problem correctly when he said, “It’s a dollar weakness story, rather than a pound strength story.”

Ultimately, trade deficits are not sustainable. No economy can continue to lose hundreds of billions per year in trade and continue to thrive. The gross domestic product of the UK was us$1.93 trillion in 2006. That means the trade deficit was in excess of 8 percent of gdp. A trade deficit in excess of 5 percent is usually considered dangerous. Eventually the trade deficit will lead to a weaker economy, and, sooner or later, a much weaker currency.

Herbert W. Armstrong forecasted that a coming crisis in the Western world’s monetary systems—the pound, dollar and shekel—would bring about the collapse of the American and British peoples.

The U.S. dollar has been in a relentless decline for almost two years. As illustrated by Britain’s growing trade deficit, it is starting to take its toll on the UK. Will the dollar eventually drag the pound sterling down with it?