Trade Balance

What it Measures:

The Trade Balance measures the U.S. Dollar value of all U.S. exports against the Dollar value of all U.S. imports. The indicator also measures trade balances for services such as financial and informational services like computer software.

The United States has run a trade deficit for many years because the value of its imports has exceeded the value of its exports. In part, this shortfall has arisen from the import of foreign oil from the Middle East and consumer goods from China.

The Current Account, which is often cited in a similar context to the Trade Balance especially for countries other than the United States, refers to the difference in the value of exported and imported physical goods, income flows, services and unilateral cash transfers.

What effect it has:

When the U.S. Trade Balance shows a smaller deficit that was expected that tends to make the value of the Dollar increase. Nevertheless, a Trade Balance deficit that widens more than expected should reduce the value of the Dollar.

Basically, a narrowing trade deficit indicates that foreigners are buying more U.S. goods and therefore need more U.S. Dollars to execute these transactions. This tends to increase demand for Dollars, and hence its value goes up.

How often it is released:

Released monthly, generally about 40 days after the end of the month reviewed.

Why it is important:

Exports and currencies are directly linked because foreigners must pay for goods with U.S. Dollars. Export demand will also often impact prices for manufacturers and producers of domestic goods and services.

Furthermore, some economists maintain that the Trade Balance should be balanced by foreign investment in U.S. Treasury Securities as foreign investors that export to the U.S. receive payment in U.S. Dollars. Nevertheless, if U.S. interest rates are low, then holding U.S.-backed securities is not as attractive to foreign investors, causing the value of the Dollar to decline.

Imports, on the other hand, must be paid for in local currencies and will increase the value of the currency in the country where that particular product or service is produced. Basically, the Trade Balance is directly tied in to the demand for a currency and has traditionally been one of the most important numbers that the currency market reacts to.