The current account deficit’s impact on the U.S. dollar

Over the past three years, the U.S. current account balance and the U.S. government’s annual budget have hit record deficit levels, and since these twin deficits are crucial to the U.S. dollar’s value, economists can’t stop worrying about how these debts may continue to affect the buck.

The current account not only tracks the U.S. trade balance, or the difference between U.S. imports and exports, but also includes income from foreign investments and payments to foreign investors. Therefore, it’s the best measure of how much the U.S. now owes foreign countries.

While the current account has been at a deficit over much of the past 25 years, this figure has more than doubled to -$608.7 billion since 1999, or 5.3 percent of the Gross Domestic Product (GDP), according to Deutsche Bank estimates. Most economists agree these unprecedented levels can’t continue indefinitely without further damaging the U.S. dollar.

The following analysis, however, focuses on short-term patterns (i.e., less than three months) in the dollar surrounding the quarterly current account balance report, officially titled “U.S. International Transactions.” (For an explanation of the report and how the current account is calculated, see “What is the Current Account Balance?”)

In addition to analyzing how the U.S. dollar fared before and after all 43 quarterly releases since June 1994, we also studied the dollar’s response to rising and dropping current account deficits as well as its behavior following larger- and smaller-than-expected deficit numbers.

The study used both the Federal Reserve’s nominal U.S. dollar major currencies index as a proxy for the dollar and the New York Board of Trade’s (NYBOT) U.S. dollar index continuous futures contract (DX). While the indices’ price moves aren’t identical because they use different weighting schemes, our comparison shows only minor differences between them.

Overall, the U.S. dollar tended to rise from the beginning of the quarter to the announcement, which the Bureau of Economic Analysis (BEA) releases roughly two weeks before the quarter’s end, and then fall in the following month. Surprisingly, the dollar dropped more after news of shrinking deficits than growing ones. However, the dollar initially gained ground after smaller-than-expected deficits compared to hefty losses following larger than expected deficit figures.