U.S. Trade Deficit hits new record!

[scorpiogurl]

Why would anyone want to hold Dollars?  I would prefer Euros, or almost any other currency from Europe (or the yen).

That is because you're not a businessman and don't know international economics.

The Euro are has negative to zero growth.  The American economy has 4%+ growth.  Holding Euros...  haha.

I am confused!!! How does growth in either economy relate to holdings of their currency??? Surely what matters when holding a stable currency is the return......Euro interest rates are higher than US interests........therefore given that the Euro is also stronger than the US dollar at the moment, it is obvious that holding Euros is more profitable than holding US dollars!!! The return is greater!!!

[scorpiogurl]

The trade deficit is quite irrelevant.

Not sure it is!!! Yes you are exchanging your dollars for goods......but as you exchange your dollars for more imports and your trade deficit increases.......the value of your currency tends to fall.........with a consequence of fueling domestic inflation.

[Richard]

I am confused!!! How does growth in either economy relate to holdings of their currency???

If you invested in the United States, your chance for getting returns or growth on your investments is significantly higher than if you had invested in Europe.  Europe is a bad place to invest right now because they constantly have negative or near zero growth.  (Old Europe)

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Yes, but that has nothing to do with interest rates, and has very little to do with the value of a currency.

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No, you're pulling bullsh**t here.

1) European interest rates are higher.  You're right.  You're also right that the Euro is a bit strong right now compared to most world currencies, especially the dollar, which has weakened.  You're right there too.  BUT:

2) Stronger currency + higher interest rates != more profit.  You can also not make any return claim because returns will be measured in Euros, not dollars.

You invest $10,000 in the United States.  US growth is 4%

You invest EU10,000 in Europe.  EU growth is near 0%.


What would you rather have?  No, I'm sorry.

3) Interest rates have little to do with your profitability, unless you're buying bonds.  If you buy bonds, you will, by definition, have zero growth.


I'm unsure what you are trying to say.

[Richard]

Not sure it is!!!

You said yourself you're confused...

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Please explain how a trade deficit devalues a currency.  A balance deficit, yes.  A trade deficit?

I'm awaiting your explanation.

[scorpiogurl]

It is quite simple Richius!!!

As the US trade deficit increases, the world demand for dollars decreases as proportionately the world buys less from the USA than it sells to them. Consequently (by the law of supply and demand) as demand for the dollar decreases its value continues to fall!!! This eventually will become inflationary and will force the Federal Reserve to raise interest rates to protect the value of the dollar.

There may come a point when the value of the dollar makes US goods more attractive to its trading partners and consequently the trade defecit will decrease in size making the above scenario redundant.

What I think is worrying for the US is that this balancing effect doesn't seem to be happening, suggesting that perhaps the US doesn't have the capacity to manufacture consumer products for the rest of the world since much of its previous capacity to manufacture such products has moved abroad to Eastern Europe and the Far East where costs are much lower.

[scorpiogurl]

I agree that growth rates in the USA are higher than those in the Euro zone!!!

However, as you state the US growth rate is 4%. So you take your $100 and invest in the US economy.

I on the other hand will take my £100 and put it in a UK bank, where the interest rates are 4.75%.

After 12 months I think my growth is higher.

Investing is a bit more of an astute game than putting all your money always into the US economy.......we outside the USA are not all stupid!!!

[opebo]

I agree that growth rates in the USA are higher than those in the Euro zone!!!

However, as you state the US growth rate is 4%. So you take your $100 and invest in the US economy.

I on the other hand will take my £100 and put it in a UK bank, where the interest rates are 4.75%.

After 12 months I think my growth is higher.

Not only do you get a higher nominal return, but over the same year, the dollar will have fallen by at least 20% against a strong currency like the Pound.  Your real relative rate of return is even higher!