Does the budget surplus or deficit impact the US dollar?

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Oct. 7 2014, Updated 5:00 p.m. ET

What’s the budget balance?

The budget balance is the difference between what a country’s government earns from taxes and other sources and what it spends. A budget deficit occurs when spending exceeds earnings.

When spending exceeds earnings, the government borrows money from its citizens. It also borrows money from foreign entities. As this debt keeps on accumulating, it’s possible that the value of its currency will decrease. The currency decreases because of fears within the international community. Other countries question its ability to repay the debt.

Also, when the government borrows from foreign countries, the demand for the currency increases in exchange for U.S. bonds. This lowers the relative value of the U.S. dollar (or USD).

Tracking the federal budget balance

The U.S. Treasury reports the federal budget balance on a monthly basis. The U.S. government ran a deficit of $128.7 billion in August. It shrank 13% compared to last year. It was $148 billion in August 2013.

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The deficit narrowed because of higher individual and corporate tax receipts. There were also lower spending budget items including defense and transportation. The deficit for the first 11 months of the U.S. fiscal year was $589 billion. This is 22% lower than the same period last year. The deficit reached a peak of $1.4 trillion in 2009. However, it has been improving since then.

The deficit as a percentage of gross domestic product (or GDP) has been declining. In the above chart, the numbers above zero imply a surplus. The numbers below zero imply a deficit. For June 2014, the deficit as a percentage of GDP was only 3.1%. This is a comfortable level—compared to the 9%–10% levels in 2009.

Budget deficit impacts U.S. debt

The deficits continue to accumulate. They keep getting added to the U.S. federal debt. The federal debt has exploded since 2008. A steeply increasing deficit is concerning in the U.S.

However, the situation is getting better. The deficit is manageable. This should be good for the USD. A strengthening USD usually leads to weaker gold prices. It’s negative for gold-backed exchange-traded funds (or ETFs) like the SPDR Gold Shares (GLD). It’s also negative for stocks like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), and Kinross (or KGC). It’s negative for ETFs that invest in the above stocks like the Gold Miners Index (GDX).

To learn more about U.S. debt and how gold price is related to it, please click here.

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