Answering this question is difficult because the balancing process is simultaneous rather than sequential, so that there is no simple unidirectional causality between trade and capital flows. For example, increased demand for dollar assets may lower interest rates and equity premiums in the United States and thus engender increased demand for imports.
But the need for import financing may raise domestic interest rates and thereby attract the required additional capital inflows to the United States. Nonetheless, as the U.S. current account deficit rose from 1995 to early 2002, so too did the dollar’s effective exchange rate.