Higher rates in this country encourage foreigners to invest in dollar securities.

In July, foreigners invested a net 667 billion yen there, according to Salomon Brothers.

"I will make this nation a place where foreigners can invest with confidence."

If foreigners are investing in a country, that is an inbound flow and counts as a surplus item on the capital account.

It stands to reason that if American investments seem less attractive, foreigners will invest less and the dollar will decline.

They are hoping that this will persuade foreigners to invest.

"It encourages people to keep their money at home, and it encourages foreigners to invest there."

But those higher rates could depress inflated stock prices and cause foreigners to flee America rather than invest more.

More fundamentally, whenever we run a deficit on current account, we force foreigners to invest in dollars.

The problem is that the rising trade deficit also results in enormous borrowing, as foreigners must invest those dollars, usually by lending to America.