Trade Gap Narrowing Shows The Value Of A Weak Dollar

Yesterday, I noted that Asia has been taking measures to keep the dollar strong. They have good reason to do so, as a strong dollar makes their goods cheaper, and consequently more attractive, to Americans. That news interacts interestingly with today's trade deficit data release. The U.S. trade gap unexpectedly narrowed in August by 3.6%, as U.S. exports increased, according to the Commerce Department. What's one reason why U.S. exports would increase? Of course, because of the weak dollar.

Just as Asia's currency seeming relatively weak compared to U.S. dollars helps their exports, U.S. dollars looking relatively weak compared to other global currencies raises American exports. Consequently, it shouldn't be particularly shocking that U.S. exports have risen as the dollar has weakened. But Bloomberg reports that the trade deficit decreasing to $30.7 billion surprised economists anyway:

The trade gap was projected to widen to $33 billion, from an initially reported $32 billion in July, according to the median forecast in a Bloomberg News survey of 76 economists. Deficit projections ranged from $29 billion to $35.3 billion.

Oh those economists. But to be fair, it wasn't only exports that drove the narrowing of the trade gap: imports fell 0.6%, mostly due to U.S. demand for foreign crude oil dropping. So the weak economy ultimately contributed to the U.S. buying less from abroad as well.

But an increase in exports is generally perceived to be a positive development. It means the U.S. is selling more of its goods to foreign nations, which U.S. firms obviously like. Revenue is revenue, whether it comes from the U.S. or abroad.

This raises an interesting question: could a weak dollar be the answer to the U.S. economy's recovery? Not really. Unlike so many developing nations, the U.S. economy is not built for export-induced growth. The dollar would have to truly plummet for the goods we purchase from Asia and South America to suddenly be cheaper for the U.S. to produce.

In fact, the trade gap isn't likely to continue to narrow going forward according to Moodys:

"The export picture is brightening," Joseph Brusuelas, a director at Moody's in West Chester, Pennsylvania, said before the report. "Imports will likely rise as the domestic economy gradually recovers and inventory liquidation slows," so trade will have a neutral effect on growth in 2010, he said.

Right. Because as the U.S. economy begins to grow again and heal, consumer demand will pick up. Consequently, imports will increase. So even if exports do increase a bit with a weakened dollar, imports will likely neutralize that effect to the trade deficit.