The Exchange Value Of The Dollar And The U.S. Trade Balance: A Partial Equilibrium Empirical Investigation

Abstract

The recent depreciation of the dollar against major currencies of the world, notably the euro, has kindled discussion on the causes of this phenomenon and the possible outcomes should it continue. Many politicians blame the rising U.S. current account deficit and some economists have questioned the sustainability of the current account deficit. This paper examines the relationship between the U.S. current account balance, the net U.S. international investment position, and the exchange value of the dollar. Our results show that there is a relationship between the exchange value of the dollar and the current account balance. However, our results do not show that the current account balance is solely responsible for changes in the exchange value of the dollar. This is not surprising given the many influences currently under investigation as possible explanations for the recent behavior of the dollar.