A Strong Dollar/Euro Could Narrow the Trade Deficit

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The U.S dollar is once again on a rally against the Euro, after it surged top a two year high on Wednesday following the Federal Reserve meeting minutes. The Federal Reserve indicates that it will only take further action if U.S economic conditions worsened. Action by the Federal Reserve is seen as having the potential to weaken the dollar, hence the rise after the announcement.

CNBC News quotes the chief market strategist at Worldwide Markets, Woodcliff Lake in New Jersey, Mr. Joseph Trevisani, stating, “There were no additional indications for the course of future Federal Reserve policy in the minutes of last month’s FOMC (Federal Open Market Committee) meeting.”

The release of the minutes from the federal government came at time when most traders and analysts are skeptical about the dollar, following its decline versus many major currencies over the past several years. This time around it was the Euro; that dropped by a record margin in two years. The Euro trades at 1.2211 versus the U.S dollar. On Wednesday and still at the time of this writing, it has already fallen further to a low of 1.2189.

The U.S has no plans of buying more assets unless, the current economic conditions worsen. This is indeed good news for the U.S dollar, as this will reduce the balance of payments (BOP) deficit against the European Community, which stood at $43.45 billion in May 2012, averaging approximately $9 billion per month from January through May. If the country continues on this year’s trend in its BOP, then it could well exceed last year’s deficit of $99.9 billion dollars.

The Euro had a remarkable rebound in June, after fears were subdued over the future of the Euro Zone community. The reason for optimism, includes Greece’s polls and the stimulus package to Spain. Nonetheless, the minutes from federal reserve meeting have brought another twist to the drama, and the consecutive massive declines are good evidence for the impact caused by Chairman, Ben Bernanke.

A person  would ask whether it is the U.S dollar that recovered, or was it the Euro that fell? Well, it bis a little bit of both. The U.S won’t be buying more assets unless it is necessary, and as we have seen, the country has a balance deficit in its transactions with the European community. This means a decline in exports for the community, affects the demand for the Euro, and then, its falls. From the U.S dollar point of view, the opposite takes effect. However, although the trade gap might narrow, it is not a reason to be overly optimistic. Exports from Europe and/or US exports to Europe would have to decline.

In other currency news, the U.S dollar was up, not just against the Euro, but also, the Japanese Yen (JPY), while the Euro (EUR) was also down against the Australian dollar (AUD), among other major currencies.

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