By devaluing the U.S. dollar against the foreign currencies of its major trade partners, America has made progress in reducing its huge trade deficit – one that hit US$811.5 billion in 2006.
The devaluation of the U.S. greenback increases the value of American exports since they are paid for in stronger currencies that translate into higher U.S. dollar amounts. At the same time, imports destined for the U.S. go down. This is partly because higher foreign exchange rates make imports so expensive that Americans will import less and simply manufacture more goods at home.
A higher dollar amount paid for U.S. exports minus less money flowing out of American wallets to pay for imports means one thing: a reduction in America’s trade deficit.
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