Friday, January 11, 2008

In Global Trade, a Cheap Dollar Cuts Both Ways

The US greenback has plummeted about 40% against most world currencies. That was supposed to have relieved America's massive balance of trade deficit by increasing demand for US made exports abroad and by reducing domestic demand for suddenly more expensive foreign goods.

The good news for the United States is that exports are indeed up, quite a bit in fact. The bad news is that so is the US trade deficit. The explanation lies in American dependence on foreign oil and recent increases in world oil prices. The latest figures, for November, show that exports rose 0.4% to $142-billion but imports rose a full 3% to $205-billion.

One thing that is working in America's favour is that OPEC continues to price oil in American dollars. If that was to shift to stronger currencies, such as the Euro or Yen, the US deficit figures would swell enormously.

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