Trade imbalances affect exchange rate movements from "summary" of International Money and Finance by Michael Melvin
Trade imbalances between countries can have a significant impact on exchange rate movements. When one country consistently exports more goods and services than it imports, it creates a surplus in its trade balance. This surplus leads to an excess supply of the country's currency in the foreign exchange market. As a result, the value of the country's currency is likely to decrease relative to other currencies. This depreciation makes the country's exports cheaper for foreign buyers, which can help reduce the trade imbalance over time. Conversely, when a country imports more than it exports, it creates a trade deficit. This deficit results in an excess demand for the country's currency in the foreign exchange ma...
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