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A US trade deficit means more US dollars around the world.

Basic supply and demand - if the US dollar supply in the world starts to grow larger than the demand, the value of the US dollar (price) is going to fall.

If your US dollar value is less, the next time you want to buy something from elsewhere in the world the prices are going to be higher.

A trade deficit should be thought of as a large out flow of cash from the country to pay for foreign goods. This builds up a whole bunch of US cash among foreigners in the rest of the world. One day they decide they don't like the US much anymore and to sell (trade in) all their US cash at once....this drives the value (price) of US cash way down....Then since the US has to use it's own cash (that's worth way less now and foreigners don't much want) to pay them for the foreign goods....the cost(price) of the foreign goods is way up to Americans.

Trade deficit or current account deficit namely imports greater than export in USA for instance is not a bad thing if capital account is active.

* A huge inflow of currency due to a capital account surplus will make supply of foreign currency greater than demand for foreign currency which came from current account deficit. *

An excess supply of foreign currency under huge inflows will make the exchange rate drop down to make it costly for foreigners to purchase dollars. This makes the dollar stronger.

But if the capital account is inactive, then we have an excess demand for foreign currency, which will increase exchange rate, as in to make it more expensive for people to buy foreign currency, so they need more dollars for a unit of foreign currency, namely a depreciation and a weaker dollar as a result.

But a capital account is obviously always present in a country which is a mode of investment and the foreigners who buy dollars when the capital account in america is in a surplus (implying greater return on investment), don't keep it but invest it in different assets.

But if they decide to sell it (don't think why this might happen) then a reversal of situation where the trade deficit will become narrow due to a capital account running into deficit because more locals now invest in foreign assets than foreigners investing in america. This happened because (refer back to * above) now the demand for foreign currency is greater than the supply. Thus increase in the exchange rate to cut the excess demand.

Now, when exchange rate increased, this will more dollars to buy a unit of foreign currency and thus a depreciation and fall in value of dollars. When dollar falls, obviously its more expensive for you to buy imports because you need more of it to buy a unit of foreign currency than you did before..

The effects of the sale are clear but i dont know why the sale would happen in the first place.

One reason is in * where effects will be reversed right after the trade deficit..an unlikely thing to happen when there is already a surplus in the capital account. Either there is a missing link where government might have acted to reduce trade deficit by spending and investing less abroad thus reducing deficit and boosting domestic output, in turn creating a deficit in capital a/c and a reversal of *

Lot of intake here..

pls lemme know if anything needs to re-clarified.

thanks

It causes a loss of jobs. No job, no money,no family.