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It should probably come as little surprise that the U.S. trade deficit actually dropped last year, falling 9% from the record all time high set in 2006. I say it should come as no surprise, mainly because you would have to have been living in a cave the past year not to realize that the U.S. dollar has been in free-fall.While no one likes to see the current shape of the American currency, the one good thing that comes from a weak dollar is that our exports become more attractive to the rest of the world. In 2006, America ran a trade deficit of a massive $811.5 billion. That number shrank to $738.6 billion last year, and should drop even further in 2008 considering the current economic landscape.
So at least we have something to celebrate right? Well, before you go doing cartwheels over the drop in the deficit you should take a second to consider just what it means to run a deficit of $738.6 billion.
What it breaks down to, is that America is, on average, borrowing $2 billion every single day in order to finance its appetite for foreign goods. Definitely something to think about. Keeping that in mind, maybe it is starting to make sense why the dollar has reached the point where it is right now. Last year's decline comes after five straight years of record setting deficits.
Of course I am not suggesting that the only reason the dollar finds itself in the situation it is currently is the trade deficit. There are several other things working against the dollar right now. Huge spending on two wars, falling housing market, and the coinciding credit crunch leap to mind. But for sure, the persistent trade deficit that America has been running is a big contributor. After all, Americans do love those Japanese cars and televisions!
For now, foreign countries have continued to be willing to ship their goods to America in exchange for dollars, but concern is starting to spread that America is on thin ice at this point. The dollar has been in a constant free fall, and is still showing absolutely no signs of life. Should the situation around the dollar continue to erode, you have to wonder just how long foreign countries are going to be willing to accumulate the troubled currency.
Michael Fowlkes has worked as a stock trader for seven years and spent the last four years working as an analyst for the online investment advisory service Investor's Observer.
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