Deficits and the Dollar Contrary to what many people seem to
believe, a simple, straightforward relationship does not exist
between a nation’s current-account balance and movements in its
trade-weighted exchange rate. A current-account deficit need not
produce a currency depreciation, and an exchange-rate
appreciation need not cause a current-account deficit. A
nation’s current-account balance and the value of its exchange
rates result from the consumption and savings choices of
individuals across the globe—all 6.6 billion of them. Many
patterns of current-account balance and currency movement are
possible, depending on the underlying factors that drive them.
Imagine, for example, that holding everything else in the world
constant, aggregate demand in the United States increases, and
as a consequence, U.S. citizens increase their imports from
abroad. Any existing current-account deficit will then widen.
Since U.S. residents need foreign currencies to buy foreign
goods, their demands for imports will drive up