If a persistent US current account deficit should eventually

If a persistent US current account deficit should eventually depreciate the dollar and eliminate the deficit, why has not happened thus far?

Solution

It is correct that current account deficit has the effect of depreciating the dollar. However, the deficit doesn\'t get eliminate due to following 2 reasons:

(1) Current account deficit is balanced by a capital account surplus. A capital account surplus means that investment by foreigners in the country is more than the country\'s foreign investments abroad. Higher foreign investment in the country means demand for dollar goes up, which leads to an increase in value of dollar, leading to dollar appreciation.

(2) A depreciated dollar makes US exports more competitive in the global market, while imports become costlier. Higher exports and lower imports reduce the current account deficit. A lower current account deficit leads to dollar appreciation.

These two counter-effects prevent a complete elimination of current account deficit.