by Frank Shostak
In July this year the US trade balance stood at a deficit of $63.6 billion against a deficit of $51 billion in July last year. Some commentators regard a widening in the trade deficit as an ominous sign for the exchange rate of the US dollar against major currencies in the times ahead.
For most economic commentators a key factor in determining the currency rate of exchange is the trade account balance. In this way of thinking, a trade deficit weakens the price of the domestic money in terms of foreign money while the trade surplus works toward the strengthening of the price.
By this logic, if a country exports more than it imports, there is a high relative demand for its goods and, thus, for its currency, so the price of the local money in terms of foreign money is likely to increase. Conversely, when there are more imports than exports, there is relatively less demand for its currency, so the price of domestic money in terms of foreign money should decline.