After years of quantitative easing and near-zero interest rates, the Federal Reserve has hinted at a normalization policy that will raise U.S. interest rates in the near future. Raising the interest rates indicates the U.S. economy is experiencing increased growth and, in particular, that inflation targets are slowly being met. While low interest rates primarily benefit borrowers and investors, an increase will also make saving more desirable. The Fed’s decision comes as unemployment reaches consistent lows and consumer confidence surges.

Besides domestic success, the U.S. continues to thrive in the global economy. The dollar continues to strengthen as the European Union and Japan use quantitative easing to stimulate growth. In a global economic climate rife with weak foreign currencies, a stronger U.S. dollar could have significant implications in international trade. Economic theory claims a strong domestic currency causes greater demand for imports than exports, furthering widening the trade deficit. This hasn’t held true recently, as the trade deficit decreased by $7.2 billion to $35.4 in February 2015. Lower oil prices, strong domestic currency and weak global demand may be predictive of a further shrinking trade deficit.

Plunging Oil Prices

After reaching a six-year low in March, falling oil prices have come to benefit the global economy. Oil has drastically fallen closer to $50 per barrel, a considerable drop from the roughly $100 per barrel it fetched between 2010 and 2013. Hoping to push out high-cost competitors and protect market share, the Organization of Petroleum Exporting Countries (OPEC) has shown little inclination to increase prices.

Falling oil prices benefit both individuals and the economy at large, shifting resources from producers to consumers. A middle class consumer who saves on gas every week is more likely to spend those additional savings on employment-heavy industries than energy industries.

The growing energy independence has also had an impact on foreign petroleum. The difference between imports and exports of fuel shrank to $8.1 billion in February, with exports decreasing 1.6 percent. Going forward, lower oil prices may provide fresh opportunities for innovative investments in reusable energy. As costs continue to decline, nations can reduce subsidies on fuel and redirect those resources to greener investments.

Oil has historically played a significant role in the U.S. trade deficit, and a strong move towards energy independence has contributed to the decline in the overall trade deficit. As technological developments in reusable energy continue to progress, the increase in U.S. manufacturing can help sustain the shrinking deficit. (For more, see: Falling Oil Prices Could Bankrupt These Countries.)

Strong Dollar

The dollar has gained strength through the actions of other countries. While Japan and Europe continue quantitative easing, their respective currencies are weakening and making the U.S. dollar appear stronger. Notably, the USD/Euro exchange rate is slowly approaching an even exchange.

Additionally, slow growth in China and emerging markets has benefited the American economy. The Chinese economy has become so large that 10 percent growth is no longer sustainable. Chinese expansion has come in the form of labor, capital and productivity; as the technological gap between China and other advanced economies narrows, all three factors will slow China’s growth.

Between unconventional monetary policy and slowing growth abroad, the American economy appears relatively strong. The Federal Reserve recently ended quantitative easing and will raise interest rates to further strengthen the currency value. (For more, see: Best Places To Go On A Strong Dollar In 2015.)

Weak Global Demand

With a number of foreign economies struggling, weak global demand has contributed to the shrinking U.S. trade deficit. A weak foreign currency leads to an increase in exports and a decrease in U.S. imports as imports become more expensive due to currency depreciation. Theoretically, this should result in an expanding U.S. trade deficit.

However, with disruptions in West Coast ports, imports contracted 4.4 percent. Yet, as expected, a strong dollar and weak global demand have resulted in a decrease in exports. Exports fell 1.6 percent in February 2015, with exports to Canada, Mexico and China tumbling while those to Europe remain unchanged.

The Bottom Line

The U.S. deficit stands at $35.4 billion, down from $42.7 billion in January—a $10.2 billion decrease in imports. Weaker foreign economies, quantitative easing in Europe and Japan, slow growth in China and a looming interest rate hike in the U.S. have buoyed the appreciating dollar. Likewise, a strong dollar, low oil prices and weak global demands have effectively shrunk the U.S. trade deficit.

With the recovery and growth of advanced economies progressing slowly and the U.S. economy's continued expansion, the U.S. is likely to sustain a decreasing trade deficit.

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