Why does a trade deficit lower the currency's value?

Discussion in 'Forex' started by nooty, Aug 17, 2009.

  1. nooty


    How and why does a trade deficit cause the currency to lose value?
  2. Because if China is trading with the USA, and China is sending more goods (higher aggregate value of the goods) to the USA than the USA is sending to China - there will be more US currency flowing into China than Chinese currency flowing into the USA. So the Chinese will have to convert their US currency into Chinese currency and when they go to do this it will increase the supply of US dollars on the market. Its a function of supply and demand.