Trade Deficit:

            Excess of a nation’s imports of goods over its export of goods during a financial year, resulting in a negative balance of trade. Trade deficit is a negative balance of trade, i.e. imports exceed exports. Opposite of trade surplus.

            Theoretically, a trade deficit (current account deficit) means a capital account surplus--in order for a balance of payments. Countries are lending us money so we can continue to purchase their goods. This means that interest rates should be lower from increased foreign savings.

            If a foreign country experiences high inflation (relative to the United States), its exports to the United States should decrease (U.S. demand for its currency decreases), its imports should increase (supply of its currency to be exchanged for dollars increases), and there is downward pressure on its currency’s equilibrium value.

            If a foreign country experiences an increase in interest rates (relative to U.S. interest rates), the inflow of U.S. funds to purchase its securities should increase (U.S. demand for its currency increases), the outflow of its funds to purchase U.S. securities should decrease (supply of its currency to be exchanged for U.S. dollars decreases), and there is upward pressure on its currency’s equilibrium value.