Trade Deficit Narrows, Bernanke's Plan Working?

On Friday, US trade deficit data for the month of October came in lower than anticipated. The balance of trade printed at negative $43.5B, less than the $43.9B that was expected. This may lend credence to the possibility that the Federal Reserve's plan is working: that is, a weakening of the US dollar. Although the Fed has clung to the promise of a "strong dollar" policy, actions ultimately speak louder than words, and the Fed's recent actions have produced anything but a weak dollar. In the wake of the 2008 financial crisis, the Fed implemented two rounds of quantitative easing. Following both rounds of easing, the US dollar's value trended downward. The Fed has good motivation to weaken the dollar; after all, lowering the trade deficit could propel the job market in the US. Politicians on both sides of the aisle in the US have recently derided China for pegging its currency—the yuan—to the US dollar. In Republican debates, notable candidates such as Mitt Romney have labeled China an active

, while Democratic Senator Charles Schumer has long been a critic of China's currency policy. If the US dollar can be made weaker against other currencies, then US exports may become more attractive to foreign consumers. That could increase the demand for US-manufactured products and create jobs in the US. Although the unemployment rate in the US has recently come down, it remains fairly high, and weakening the dollar could present an attractive option to US policy makers. Yet, perhaps most interesting from the data on Friday was that the US' imports

hit a record high. This indicates that, despite the rhetoric, the US is unable to lower the advantage Chinese manufactures have. Rather, the benefit to US manufacturing may be coming from other areas of the globe such as Europe. Still, as economic conditions appear to be deteriorating, the US dollar could be set for a rally. Although the euro crisis appears to have been slowed by Eurozone officials on Friday, uncertainty remains. Should the world experience another financial crisis, the dollar could once again strengthen. That could be beneficial for the dollar, and cause the trade deficit to rise once again. Still, the dollar appears to remain on a downward trajectory. If that trend continues, investors may anticipate a further contraction of the trade balance going forward.