III The Balance of Payments and Exchange Rates If U.S. residents lend and invest less in foreign countries than foreigners lend and invest in the United States, the financial account will be in surplus. If U.S.
purchases of foreign stocks and bonds exceed foreign purchases of U.S. stocks and bonds, then more funds are leaving the country than entering it, and the financial account will be in deficit. Pretend that you are willing to sell your DVD player to a French resident.
Would you prefer to be paid in U.S. dollars or in euros?
Since you can’t easily spend euros in this country, you would prefer to be paid in U.S. dollars. Therefore, if the French buy more U.S. goods and services, they will need dollars to pay for them, and the dollar will appreciate against the euro. Similarly, if U.S. investors demand more French bonds and stocks, the euro will appreciate.
What impact will a financial account surplus have on domestic currency? If U.S. federal budget deficits continue, what will be the impact on the dollar?