Why Trade Deficits Matter

The short version is that trade deficits, along with a few other factors, tell us whether a country’s currency is more likely to strengthen or weaken going forward.

However, it often takes several years for trade deficits to matter for a currency, which means that for the vast majority of investors and traders, trade deficits aren’t really factored

And for decades since then, the United States has had a current account deficit. It reached 3% of GDP in the mid-1980’s until the Plaza Accord purposely reduced the dollar’s strength, which helped fix the deficit briefly. Then it spiked to 6% of GDP but the self-correcting force of the subprime mortgage crisis reduced that back down a bit.

Due to decades of these deficits, the United States has indeed developed a large negative net international investment position, equal to about -50% of U.S. GDP: