Over the past few years, the failure of the USD to decline in response to soaring trade deficits has baffled economists, leading some to propose that the only reason the USD has not depreciated is foreigners’ continued willingness to finance the deficits. A new theory, however, is quickly gathering support among economists. It suggests that the common interpretation of current account deficits is unreasonable. Basically, a significant portion of US trade takes place between US companies and their foreign subsidiaries. A change in exchange rates, thus, would not cause much of a change in trade patterns. As a result, a rising current account deficit may not be as large of a problem as has long been argued, as a decline in the USD would not produce a significant drop in the deficit. Reuters reports:

One reason put forward for the growing impotence of currency rates in synching trade accounts is that national trade statistics disguise the real nature of trade flows.

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