Currency Exchange Rate Trading

Foreign Exchange Rates Part of International Trade Strategy

Jul 17, 2007

Allowing the U.S. dollar to fall against foreign currencies is one way to increase money flowing in for American exports while reducing money flowing out for imports.

By devaluing the U.S. dollar against the foreign currencies of its major trade partners, America has made progress in reducing its huge trade deficit – one that hit US$811.5 billion in 2006.

The devaluation of the U.S. greenback increases the value of American exports since they are paid for in stronger currencies that translate into higher U.S. dollar amounts. At the same time, imports destined for the U.S. go down. This is partly because higher foreign exchange rates make imports so expensive that Americans will import less and simply manufacture more goods at home.

A higher dollar amount paid for U.S. exports minus less money flowing out of American wallets to pay for imports means one thing: a reduction in America’s trade deficit.

Below is a list of rates on July 16, 2007 for America’s top trading partners. The percentage in brackets shows by how much the foreign currency strengthened or weakened against the U.S. dollar since January 2007.

The Canadian dollar (also known as the loonie) registered the strongest gains, followed by the Euro. The largest and fastest-growing contributor to the U.S. deficit, China saw its currency go up a modest 2.6% against the American dollar. Japan is responsible for America’s second-largest deficit by country, with the Japanese Yen depreciating very slightly.

Some 80% of Canada’s exports are delivered to the U.S. The Canadian loonie’s big hike will inevitably decrease American demand for Canadian exports. Already Canadian newspapers report plant closures as well as slowdowns in the Canadian tourism and related service industries.

Using money exchange rates, America could decide to eliminate its trade deficit by 2012. If so, that aggressive international trade strategy may cause the U.S. dollar to depreciate a further 20% from its current value against the loonie.

With the Canadian dollar worth almost US$1.20, America’s US$100 billion trade deficit with Canada would change to a surplus of around US$80 billion. The reason is simple. Higher money exchange rates for the loonie make Canadian imports into the U.S. prohibitively expensive. America will find it cheaper to ship products from U.S. plants and import more from countries with weaker currencies.

While the above scenario results in the American trade deficit situation brightening, Canadian exporters will see much darker days. This is particularly true for manufactured goods, automobiles, oil and any industry where operating margins are thin.

Sources for this Article

This article presents independent calculations and insights based on online currency exchange rates at x-rates.com & from data in the article 'The U.S. Deficit and Canada' (David Crane, Toronto Star, July 7, 2007).

The copyright of the article Currency Exchange Rate Trading in International Trade is owned by Daniel Workman. Permission to republish Currency Exchange Rate Trading in print or online must be granted by the author in writing.