Current Account Deficit

From the July 2003 Trumpet Print Edition

Probably the most significant factor placing downward pressure on the dollar is the recurring and record current account deficit.

The current account is made up of three components: the trade account, measuring the difference between exports and imports, the income account, which largely reflects interest payments on foreign debt, and the transfer account—substantially, foreign-aid payments.

The exchange rate is related to the current account because international transactions require exchanging dollars for foreign currencies. When the U.S. imports goods, the foreign supplier must be paid. That payment is then exchanged into the currency of the supplier for use in his home country or to trade with other countries. Hence, if the value of imports is greater than the value of exports, a net sell-off of U.S. dollars occurs, putting downward pressure on the currency.