The unexpected narrowing of the US trade deficit in June is one of the main drivers of recent dollar strength.

But before you pop the champagne corks, Charles Delvalle in Investors Daily Edge says you should first be aware that a narrowing trade deficit means a slowing economy.

And Chuck Butler in The Daily Reckoning says you have to be careful what you wish for. A stronger dollar could spell the beginning of the end for the US economy.

According to Charles, a narrowing trade deficit is not the bullish indicator Big Media says it is…

A trade deficit by its very nature can hamper economic growth at home since the money is leaving our borders. Because of that, many economists believe that the US should work on correcting its huge trade deficit.

One of the ways to shrink a trade deficit is by increasing exports. And one of the surest ways to increase exports is by letting your currency slowly devalue. Since the year 2000, the US dollar has lost nearly 40% of its value. Sure enough, US exports increased for at least the past four years. In June alone, exports increased four percent.

So far in 2008, our trade deficit is down $7 billion from last year’s level. But don’t pop the cork and start celebrating just yet. The real reason why our trade deficit shrunk this year is because the economy is slowing.

According to the CATO Institute, when the trade deficit is growing, GDP growth averages 3.5 percent. But when the trade deficit is shrinking, GDP growth averages 2.6 percent. That’s 25 percent slower GDP growth.

For Chuck, the bigger problem may be a stronger dollar itself…

A stronger dollar will not play well, share toys, and keep its hands to itself, with exports… And exports have been something short of amazing with the dollar being weak.

In fact, exports have accounted for the largest contribution to GDP in the past 5 quarters! (with U.S. Consumer spending drying up, this is possible!) Add to that, everyone getting goose bumps regarding a global slowdown… If the world slows down, like the dollar bulls are claiming they will, thus propping up the dollar, then U.S. exports will slow even more!

You know… The 4th QTR of 2007’s “revised” GDP came in at negative -.2%, and we were just getting started on the road to recession, folks… And now, just when U.S. consumers have their tax stimulus checks to spend, and prop up GDP, the dollar gets strong, and exports take a ride on the slippery slope… It’s all over now… Baby Blue…

I was being interviewed by a newspaper reporter from Buffalo yesterday and I told him the same old song and dance that I told you yesterday about how this can’t be the end of the Weak dollar trend. He then asked me what would be the signs that this dollar rally could continue… Ahhh grasshopper, sit, and listen….

1. First and foremost the Current Account Deficit has to show a willingness to correct the imbalances that exist.
2. That the U.S. data reports (housing, employment, financials) begin to show marked improvement…
3. A sign that the Eurozone economy is “really” in deep dookie, not just a slowdown….
4. Net Purchases of Securities by foreigners begin to show marked improvement…

OK… The Budget Deficit widened to $102.8 Billion for July… The Trade Deficit may have narrowed, but the Budget Deficit widened! UGH!

Source: What a Shrinking Trade Deficit Means