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Exchange rates do not affect the balance of trade.

Of course they do!

Trade is determined by price differences. If the US dollar is overvalued (as it has been for much of the last 40 years), then American goods are more expensive abroad. It's what killed the American steel industry for Pete's sake.

Now, there's a lot we could do in the US to improve our competitiveness (lower taxes on profits and capital), but even those won't be able to overcome a high exchange rate. Now, don't get me wrong -- I do not agree with the current policy of deflating the dollar to drive its value down.

But a stable money supply combined with a balanced federal budget (no constant supply of Treasurys to sell abroad) would help bring our exchange rate back to some semblance of where it should be.

It would do wonders for the trade deficit, too.

Of course they do!

Seems we got a lot of people interested in convincing me that a weak dollar increases exports. OK people, first you'll need to show me how the exchange rates go up and down---

--and then explain why the trade balance goes up and down in a way that has nothing to do with exchange rates--

--and when you check it year by year the two are together half the time and go separate ways the other half.

	trade deficit	dollar exchange rate	trade	dollar	correlation
1973	0.14%	108.19
1974	-0.29%	105.84	down	down	direct
1975	0.76%	100.42	up	down	inverse
1976	-0.33%	105.62	down	up	inverse
1977	-1.34%	107.12	down	up	inverse
1978	-1.30%	101.14	up	down	inverse
1979	-0.96%	94.46	up	down	inverse
1980	-0.70%	95.07	up	up	direct
1981	-0.52%	96.03	up	up	direct
1982	-0.74%	107.14	down	up	inverse
1983	-1.63%	115.69	down	up	inverse
1984	-2.77%	125.36	down	up	inverse
1985	-2.89%	138.97	down	up	inverse
1986	-3.10%	120.19	down	down	direct
1987	-3.20%	101.85	down	down	direct
1988	-2.24%	89.62	up	down	inverse
1989	-1.70%	90.55	up	up	direct
1990	-1.39%	92.41	up	up	direct
1991	-0.52%	85.01	up	down	inverse
1992	-0.62%	85.61	down	up	inverse
1993	-1.06%	91.5	down	up	inverse
1994	-1.39%	92.01	down	up	inverse
1995	-1.30%	87.07	up	down	inverse
1996	-1.33%	86.45	down	down	direct
1997	-1.30%	90.04	up	up	direct
1998	-1.88%	98.49	down	up	inverse
1999	-2.84%	94.48	down	down	direct
2000	-3.85%	96.06	down	up	inverse
2001	-3.58%	103.51	up	up	direct
2002	-4.02%	111.21	down	up	inverse
2003	-4.52%	98.77	down	down	direct
2004	-5.23%	84.38	down	down	direct
2005	-5.77%	81.05	down	down	direct
2006	-5.48%	84.44	up	up	direct
2007	-4.84%	82.37	up	down	inverse

Seriously, when I first learned about this it seemed impossible, but when I checked just how cross border trade worked it made perfect sense. Let me know if anyone's interested in what I found out.