It’s not just trade. Trump may want a dollar deal, too

Published in Financial Post.

In the furore around the on-again, off-again Trump tariffs, it sometimes gets lost that the international trade of goods has implications for international financial transactions and therefore for exchange rates, too. In general, a weaker currency makes a country’s imports more expensive and its exports cheaper. The U.S. dollar is down more than eight per cent since the beginning of the year against a basket of other currencies. Though Canada is on the front line in Donald Trump’s trade war the loonie is up more than three per cent against the U.S. dollar.

The United States has a large “current account” deficit. The current account tracks payments related to trade in goods and services, as well as direct transfers of money to other countries. The U.S. has a big surplus in services (which President Trump never talks about!) but its deficit in goods and its net transfer payments to other countries offset that. You can think of the U.S. current account deficit as money flowing out of the country.

But, as the saying goes, the balance of payment always balances. The U.S. finances its current account deficit either by borrowing from the rest of the world or depleting its stock of international reserves, such as gold. When it borrows, that brings money back into the country.