Tuesday, June 10, 2008

Balance of Trade


Today the Department of Commerce announced April’s foreign trade deficit of $60.9 billion (http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf). It’s been falling irregularly since it peaked at $67.1 billion in August of 2006. That is, since the number has become smaller, the deficit has been improving (i.e. diminishing).

But the dollar has also slumped, as the following chart illustrates.

Foreign Exchange Value of US Dollar

(Click on chart to enlarge)

Recessions shaded

If our trade deficit is shrinking, why is the dollar’s value also shrinking?Shouldn’t they move in opposite directions? If the rest of the world buys more of our goods and services and we by less of their goods and services, shouldn’t the value of the dollar rise? Yes. So what’s happening?

The answer lies in the fact that the rest of the world also buys and sells dollars to make investments in the US. Lately folks in the rest of the world haven’t liked the investment climate here – weak stock market – and have been selling dollars in order to purchase their local currencies and repatriate their funds.

Putting the matter even more strongly: If foreign investors dump dollars and the dollar’s value consequently falls, the rest of the world might be more inclined to buy our exports if they have a lower dollar value. In other words, the chain of causality runs from the dollar’s value to exports, not the other way around.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of Economic Indicators.)

© 2008 Michael B. Lehmann

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