The current picture

As of March 2007, the U.S. had an account deficit of more than $800 billion, the largest in the world. A deficit of that size has some analysts predicting a total collapse of the U.S. dollar, although the buck has mostly held steady even as the account deficit has climbed from about $115 billion in 1995. Nonetheless, many believe the U.S. dollar is still in danger. Account balance also influences a country’s gross domestic product (GDP).

An account surplus or deficit is often mentioned as a percentage of GDP as a way to measure the potential impact the account balance can have on a country’s economy. As of the latest measurement, the U.S. account deficit was more than 6 percent of its GDP. The actual ratio isn’t important; rather, it’s whether the ratio is increasing or decreasing that is used to help determine which way a country’s economy is headed.

For example, if a country’s account deficit represents 6 percent of its GDP in one reading, then 5.5 percent the next time, it is considered a sign of an expanding economy. Conversely, decreasing ratios are theoretically the sign of a declining economy, although a recent study (http://www.freetrade.org/node/598) has found the correlation to not necessarily be true.

As is the case with all indicators or statistics, account balance is not the end-all, be-all for determining how a country’s currency may fare in the short-term. The data is at least a month old, and some of the components that comprise account balance are already known ahead of time. Nonetheless, the account balance provides insight into how economies interact with each other, and as such is an import ant number for currency traders to consider.