Sunday, October 14, 2007

Weak Dollar Benefits Uncle Sam

Sources: Financial Times, Los Angeles Times

The US economy saw benefits in August because of the record-cheap dollar. The cheap dollar, trading at record lows versus the Euro, has worked in conjunction with strong worldwide demand--increasing US exports. US exports hit a record high in August, fueled by demand in Asia and Europe, and these increases has shrunk the trade deficit to its smallest size since 2004.

A weak dollar helps US exports by making American goods cheaper in other countries. The trade gap was 57.6 billion in August 07, compared to 67.6 billion the same time a year ago. Exports of good and services rose to 138.3 billion. Despite this improvement, however, the trade deficit with China continues to grow.

Economists project a continually weakening dollar in the short-term, which will likely continue resulting in stronger exports. In turn, this projects to increased demand and production, and therefore possibly more job creation in the longer term. In the shorter run, however, the slowing domestic US economy could continue to shrink the trade deficit. US domestic woes may also temporarily slow demand for imports. American shoppers slowed their shopping pace in August, and September appears to be no different. Therefore, at least for September as well, it appears that the US trade deficit may continue to shrink—at least relative to European trade.

Discussion Question:
The weak US dollar has not yet been able to stabilize the trade deficit with China, as the deficit with China continues to grow. What measures, if any, can the US take to close the growing deficit?