Economic indicators - T
The measure in the differences between exports and imports of any type of services or tangible goods is called trade balance. The levels of these measurements are a widely accepted way to follow the foreign exchange markets. The trade balance is a major indicator in the various trends in foreign exchange. The overall economic status of the economy is determined by the levels of the trade balance.
Often it's the best interest of the economy to examine the growth rates for imports or exports on a separate basis. The trends that occur in the activities of a particular country in exporting products reflect greatly on the competitive position the country holds and its economic strength. The trends that occur in importing products, does just the opposite and reflects the economic strength of the domestic activity.
Typically, any nation that has a substantial deficit in their trade balance will have a weak currency. This is due to the fact that commercial selling of that particular currency is continual. Financial investments that flow for extended periods of time can however offset the effect that trade balance deficits can have on the currency.
A trade gap that is consistently widening raises concerns that the dollar is over valued, this is of particular concern when exports are weak. Strong imports create more complex issues that perhaps the domestic spending is too strong. When this occurs, higher interest rates are sometimes needed to support the dollar.
At the same time, there could also be pressure to weaken the dollar in order to close the trade gap by boosting exports. Whenever the trade deficit is higher than anticipated, it tends to make the dollar weaker, especially if the exports are weak as well.