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Unexpectedly Narrowed Trade Deficit Lifts The U.S. Dollar

Unexpectedly Narrowed Trade Deficit Lifts The U.S. Dollar

2011-09-08 19:48:00
Trang Nguyen,
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THE TAKEAWAY: U.S. Trade Deficit Narrowed > Exports Increased and Imports Decreased > U.S. Dollar Strengthens

The report issued by the Commerce Department today showed that U.S. trade deficit shrunk by 13.1 percent to the lowest level in three months. The trade deficit fell to $44.8 billion in July, beating economists’ estimate of 51.0 billion, according to Bloomberg survey. The figure for June was revised lower, to minus 51.6 billion from minus 53.1 billion, as originally reported.

U.S. Trade Balance (BLN$): July 2008 to Present

Unexpectedly_Narrowed_Trade_Deficit_Lifts_The_U.S._Dollar_body_Chart_12.png, Unexpectedly Narrowed Trade Deficit Lifts The U.S. Dollar

Prepared by Trang Nguyen

The narrower trade gap was explained by an increase in exports to record $178.0 billion in July from $171.8 billion in the previous month as well as a decrease in imports to $222.8 billion from $223.4 billion. Exports climbed 3.6 percent as U.S. manufactures sold more automotive vehicles, aircrafts, industrial equipments and materials to foreign markets. Meanwhile, imports declined by 0.2 percent mostly due to the drop in crude oil, foods, feeds and beverages purchases from overseas. A less negative trade balance fuels foundations for further domestic growth and expansion because more goods would be produced cross the country and less capital has been flowing abroad.

EUR/USD 1-minute Chart: September 8, 2011

Unexpectedly_Narrowed_Trade_Deficit_Lifts_The_U.S._Dollar_body_Picture_7.png, Unexpectedly Narrowed Trade Deficit Lifts The U.S. Dollar

Charts created using Strategy Trader– Prepared by Trang Nguyen

In general, monthly U.S. Trade Balance report is one of major forces driving the foreign exchange market. Since demands for the American goods hit the record high, the greenback is also in high demand and strengthened against its major peers. As can be seen from the one-minute EURUSD chart, the EUR/USD rapidly dropped by 40 pips from 1.4060 to 1.3940 after the released figure beat expectations. Better-than-predicted trade deficit in the United States and intensified ongoing debt crisis problem in the Eurozone pushed the EUR/USD under selling pressure. The Relative Strength Indicator (RSI) falling below 30 indicated that traders oversold the currency pair. It is evident that the deficit contraction was the bright spot for the American economic recovery that prompted money managers and traders to gain their dollar holdings.

Written by Trang Nguyen, DailyFX Research Team

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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