Qbank - Currency forecast

[FrankCFA]

Suppose the U.S. has a persistent current account deficit. Which of the following approaches to forecasting currencies best explains why the U.S. dollar will be strong during this time period?

A) The savings-investment imbalances approach.
B) The relative economic strength approach.
C) The capital flows approach.

 

[Galli]

guessing C
CA deficit -> inflow of capital to finance CA deficit -> demand for USD -> toy cars can continue to be purchased from China

 

[Hard Dollars]

A is the answer
According to this approach, current account deficit will need to be financed with foreign flows; hence, the country will require keeping local currency strong.