This latter view implies that the trade deficit is less worrisome so long as the dollar remains strong. The dollar s international value is also related to differences in interest rates between countries. A major concept in international finance is uncovered interest rate parity the notion that interest rate differentials must be balanced by expected changes in currency exchange rates. According to this view, recent increased differentials between U.S. interest rates and those of Germany and Japan suggest that the dollar is expected to depreciate more than before. Researchers have found little evidence of a link between short-term interest rate differentials and exchange rate movements.
Petroleum products form a major component of the recent decline in the U.S. goods balance.
The volume of petroleum imports has risen sharply since 1999, with prices increasing at a faster rate than other import prices or even overall consumer prices. The importance of petroleum price increases depends largely on whether they are expected to be temporary. The positive correlation between the Import Price Index for petroleum and the 10-year U.S. Treasury bond yield is consistent with an increase in expected inflation imbedded in the bond yield. On the other hand, interest rates may have risen partly in anticipation of increased inflation .