The US can eliminate its trade deficit or run the world’s dominant currency—but not both
Here’s where currency enters the picture. When Americans buy other countries’ exports or invest abroad, they fork over dollars to do it. The foreign recipients can then use those dollars to buy US exports or invest in US assets (among other things).
Now, if the rest of the world took the dollars they earned from selling their wares to American consumers and used all of them to buy goods and services imported from the US, the system would balance out.
Bam! No more US trade deficit.
But if that happened, foreigners would have no dollars left over to hold for safe keeping or put to other uses. (Also, the US might not be a position to export enough to meet the demand, in any case.) So, in the end, to ensure that the global trade and financial system is awash in dollars, the US must run a trade deficit.
