Following the December increase in interest rates, the dollar has increased in value, which makes dollars more expensive to buy for foreigners and makes the goods of foreigners cheaper for Americans for buy.
The data on the April trade data has just been released, and the stronger dollar shows up clearly, as Americans bought more goods from foreigners (which increases our imports) and foreigners bought fewer goods from us (which decreases our exports).
Exports fell by $483 million, and imports rose by $1.9 billion. The monthly trade deficit increased by $2.3 billion to $47.6 billion. If we convert those numbers into percentages of GDP, exports fell 0.4% and imports rose 1.3%. This is important, because a trade deficit is a drag on GDP growth -- a minor one, but still a drag.
The value of the dollar has now slowed. If the Fed doesn't raise interest rates this month, we may actually see a little welcome depreciation in the cost of the dollar. With respect to our short-term trade deficit, I hope so. However, with respect to normalizing the long-term level of interest rates, I hope they do raise interest rates. Yes, the U.S. economy can afford it!
