Currency, Current Account, and Capital Account

Unexpected decrease in the budget deficit of U.S. government

Economy		↓ (slowdown)
Inflation		↓
Imports		↓
Exports		↑
USD		↑ (appreciation)
Government borrowing		↓
Real interest rates		↓
Investment funds		flow out of the U.S.
USD		↓ (depreciation)	(*)
Aggreate demand		↓
Imports		↓
Current account deficit (Trade deficit)		↓	(***)
Domestic (U.S.) interest rates		↓	(**)
Foreign investment in the U.S.		↓
Domestic capital invested in foreifn countries		↑
Capital account surplus		↓

(*) Since financial capital is mobile, the effect of the interest rate change generally dominates in the short run, leading to short-run devaluation.
(**) Due to less government borrowing.
(***) Current account; balance of trade = exports - imports (of goods and services)